Should I tap my pension to buy a car?

By Tara Baukus Mello •

Dear Driving for Dollars,
I am retiring in about six months, and I'm planning to buy a new car. There are several ways I can finance the purchase. I can pay cash from a savings account, use certificates of deposit that are maturing or borrow from my pension with an interest rate of 3.3 percent over five years. I'm thinking the pension is the best choice due to the interest rate. The loan will reduce my monthly payout, but it is not enough to affect my standard of living. What should I do?
-- Joanne Soon To Be Retired

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Dear Joanne,
Your smartest financial decision is the one that will cost you the least. Paying cash for a car will cost you the least because you won't pay any interest. But if the interest you are earning on that money currently in savings exceeds the interest rate you can get on a car loan, then financing the car can still put you ahead. This is true whether you use money from your savings account or the CDs that are maturing.

As far as borrowing from your pension when you retire, the 3.3 percent rate is a good rate, but interest rates on car loans are lower than they have been in recent years. If you have good credit, you may qualify for a similar rate through the automaker's lending arm or a credit union.

If you do opt to borrow from your pension, make sure you understand any tax implications from doing so as well as what that money is expected to earn in interest if you keep it in your pension fund. It's likely that it may be better financially to get a car loan elsewhere, even at slightly higher interest rate, and keep your pension fund intact.

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