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Buy if you wish, lease if you want.


Dear Mr. Berko:

I have three questions I’d like you to answer. I’m going to buy a car for $28,000, and I would like to know if it’s cheaper for me to lease or to buy the car.

I have 10 years remaining on a $47,000 mortgage at 7 percent and have 12 more working years until I retire at 67. Does it make better sense to pay off my mortgage using some of our certificates of deposit? I’m not in stocks and we have $102,000 in low-paying CDs. That way, we won’t have to make any more monthly payments, which gives us $688 more each month to spend.

Finally, I am considering an individual retirement account, and my wife is considering a 401(k) because she is going into private-duty nursing. How much can we put in each year?  Please answer these questions right away so we can have the information we need to make our plans. If there’s a charge for this, please let me know before you answer.L.E., Jonesboro, Ark.

Dear L.E.:

The only charge is the two quarters you paid to buy your excellent paper, which is still one of the best bargains in Jonesboro today.

The first two questions – should I buy or lease my next car and should I pay off my mortgage – are some of the most frequently asked financial questions. Among the many letters I get each week, at least eight or nine ask those questions.

Should I lease or buy my next car? I am certain there isn’t a worthwhile, hard-dollar difference between the two. Considering the remote possibility that I could be wrong, I asked the following question of three accountants (figuring I’d get three different answers): “Compare the purchase of a 2003 mid-sized car priced at $28,000 with a 10 percent down payment financed at 6.5 percent for four years versus leasing the same car with a $520 deposit, assuming the mileage limits are not exceeded.”

Wonders of wonders. I got the same answer from each accountant, which is that it “doesn’t make a tinker’s damn worth of difference if you buy or lease.” This answer applies to 95 percent of American car buyers.

So, here are the unadulterated numbers, which are as complex as an ice cube. If you lease the car, the total of your 48 payments plus the $520 deposit comes to $24,700, and after 48 months, you’re back to square one and have an empty garage. However, if you purchase that car, your 48 monthly payments ($670 each) would total $32,200, but the resale value after four years would be about $8,000. So, subtracting that $8,000 from your $32,200 in payments brings your cost of buying the car to $24,200. Basically, it’s a wash.

Your home mortgage question is a bit more complex. The rule of thumb suggests that it is unwise to pay off a mortgage if the money you would use could very safely earn more than the interest paid on your mortgage.

A mortgage specialist with the Federal Deposit Insurance Corp. tells us that you must compare the after-tax cost of your mortgage versus the after-tax costs of the earnings on the $47,000 you would invest. So, assuming you can earn 6 percent on a 10-year CD and you’re in the 20 percent bracket, your net after-tax return would be 4.8 percent. Because you can deduct all the mortgage interest (providing your joint incomes are less than $139,000) a 7 percent mortgage costs you 5.6 percent. So the rule of thumb tells you to pay off the mortgage.

You should have sufficient liquid assets (after paying off the $47,000) to maintain your current comfortable lifestyle. However, there’s another rule of thumb you should consider: Continue making the $688 monthly mortgage payments (every month) into a savings account for 10 years. If that savings account pays a mere 2 percent, you will have more than $100,000 waiting for you when you retire.

Now, the IRA/401(k) rules for this year are still very confusingly simple. If you’re under 50, the max you can put into an IRA is $3,000. If you’re over 50, Big Daddy allows you to contribute $3,500. For 401(k), workers under 50 can contribute $12,000 this year and those over 50 can contribute $14,000. Next year those limits increase to $13,000 and $16,000, but so far the limits to IRAs (including Roths) will remain frozen.

Rep. Rob Portman, R-Ohio, has proposed raising the minimum age at which you must begin taking money from your retirement account from 70 1/2 to 75, but don’t expect this to occur soon, if ever.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net.

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