Depreciation Is for Chumps: 3-year-old Cars, Half Off
Audi A6, BMW 3-Series, Benz E-Class
Does your neighbor lease a new car every three years? You might silently say a word of thanks because it’s dudes like him who eat most of the depreciation on cars — and then make them available to the rest of us, still in great shape and at a huge discount to new.
Right now, quite a few models coming off three-year leases are more than 50% cheaper than a new one. And many more models are at least 40% off.
For whatever reason, your neighbor and others like him choose the lease-payment treadmill — a terrible financial move — described in an earlier column.
We won’t dwell on the negative aspects of car leasing here because there’s a fabulous upside for those who don’t lease: a steady supply of well-maintained, lower-mileage used cars sitting at dealerships and offered at attractive prices.
Do this right, as is explained below, and you’ll also wind up with an extra $100,000 in retirement savings.
According to Experian Automotive, about three in 10 new cars sold the past few years were leased. The typical lease is for three years, at which point the vast majority of people return the car. More than 4 million cars came “off lease” last year. Forecasts for this year are for only a slight dip.
Over at Iseecars.com you can find a fabulous analysis of off-lease cars, their 3-year-old price and the savings compared to the cost of a new model:
- Audi A6: $27,890, or 55% off new
- BMW 3-Series: $22,718, or 53.4% off new
- Mercedes Benz E-Class: $31,454, or 52.7% off new
The site has lists of cars under $15,000 (averaging 39.4% off new); SUVs (averaging 39.7% off new); pickup trucks (averaging 34.3% off new); sports cars (Ford Mustang 47.2% off new); hybrids (Ford Fusion 54.9% off new); electric vehicles (Tesla Model S 36.3% off new) and more.
If you can resist a Jaguar F-Type at about $47,000, or half off a new one, the best “lightly used” deal for anyone looking to build financial security might be the Nissan Sentra. A 3-year old model costs less than $12,000, a discount of more than $7,000 compared to buying new.
Right off the bat, that’s likely to leave you with a manageable car payment that you can polish off sooner than later.
Assuming a 5% loan rate, that works out to about $360 a month if you take three years to pay it off, or $276 if you have a four-year loan. For the record, the average new car loan payment is more than $525 according to Experian Automotive, and runs for nearly six years. Don’t be that person.
Let’s assume you buy the used Sentra and take out a three-year loan. Flash forward three years, and you have the car paid off, and it’s just six years old. The average car on the road these days is more than 11. Again, making a reasonable assumption you can rely on the car for (at least) another five years, that’s five years of no car payments.
If you plunk $360 a month into a Roth IRA for the next five years, and then don’t make any additional contributions but let the money grow for another 20 years, you will have about $100,000 saved for retirement. Just because you bought the less expensive car. (This assumes an annualized rate of return of 7%.) That’s a tax-free $100,000 from your smart car-buying strategy, as withdrawals from Roth IRAs are not taxed. If you’re under 40, the Roth is likely better for you.
Or take the $360 a month and plunk it into a savings account, and your emergency savings will have another $21,000 after five years, assuming a 1% annualized rate of return, which is about all you can get today from the best “high yield” online bank savings accounts. That’s peace of mind.
Or use the $21,000 to buy your next used car without a loan. That will give you more years where you don’t have to make car payments, and can use the money to build financial security.