Ryan Ermey: If you're looking for a new set of wheels without breaking the bank, you're likely looking at used cars. But where to even begin? Well, start here. Kiplinger's resident car guy David Muhlbaum joins the show to talk used car buying strategies in our main segment, and because Sandy is out for today's show, we let him stick around. We'll talk the ends and outs of the new payroll tax cut and I'll go over some of the finer points of my online brokerage rankings. That's all ahead on this episode of Your Money's Worth. Stick around.
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Ryan Ermey: Welcome to Your Money's Worth. I'm Kiplinger's associate editor Ryan Ermey and Sandy Block is away from the podcast today dealing with some family issues. And so stepping in for her today is Kiplinger's senior online editor David Muhlbaum. Thank you for stepping in on such short notice, David. Really appreciate it.
David Muhlbaum: My pleasure. Hello, hello, hello.
Ryan Ermey: So we're breaking down the payroll tax cut in our opening segment today, and for those of us who haven't heard, starting September 1st, your employer doesn't have to withhold the 6.2% Social Security payroll tax from your paycheck if you earn $4,000 or less for a biweekly pay period or less than the equivalent amount if you're paid weekly, monthly or on some other schedule. So this payroll tax break runs through the end of 2020. If your company participates in the program, which you should know that it isn't required to, you can get a boost of up to $248 in each biweekly paycheck during the last four months of the year. So that can add up to as much as $2,232 in your pocket for 2020. Except, Muhlbaum . . .
David Muhlbaum: Except, yes. There's a catch. You have to pay the money back in the first four months of next year -- 2021. President Trump wanted a payroll tax cut for 2020 but the best he could get without Congressional action was a payroll tax deferral. In other words, he can temporary suspend your employer's obligation to collect through withholding and pay in this Social Security tax, but he can't just wave his hands and make it go away.
Ryan Ermey: So the IRS says any business that defers collection and payment of the payroll taxes in 2020 will have to . . . just to give a little bit of detail, will collected defer taxes from paychecks from January 1 through April 30, 2021. So for the first four months of 2021, you could have a 12.4% rather than 6.2% withholding from your paychecks to make up for taxes that weren't collected the previous years, and if you switch jobs in 2021 or if you're not working next year, it's pretty unclear as to whether or not you'll be required to pay the tax in 2021.
David Muhlbaum: Yeah. It's pretty hazy -- and since many businesses don't want to be in the position of double taxing their employees or that's not going to go over very well, many aren't going to play along. So don't be surprised if your employer continues to withhold Social Security payroll taxes from your remaining 2020 paychecks. The U.S. Chamber of Commerce and a number of other U.S. business organizations said that many of their members aren't participating. But you know who will though? The federal government.
Ryan Ermey: Yeah. And Trump has promised to push for the elimination of the taxes so that workers won't have to pay them later if he's re-elected. But, obviously, that's a big if. And it would require not only his re-election, but probably at least GOP control of the House and Senate. And even then, you still have to get into the whole can of worms about whether we really want to be defunding Social Security or not. So the upshot of this is if you end up with extra money in your paycheck for the rest of 2020, we don't suggest that you spend it. It's a no interest, short term loan that you're going to have to likely pay back very soon. So we have all of the information on this on Kiplinger.com. Our colleague Rocky Mengle has an excellent story on it. We will put that in the show notes and be sure to go check it out.
Ryan Ermey: Is it really a good idea to buy a former rental car? Dave has firsthand experience on that front and gives you the lowdown next.
Ryan Ermey: We are back and we're so lucky to have Dave Muhlbaum on for our main segment, because we're talking buying used cars today. For those of you who haven't listened to this show before, David is our resident car guy, which is excellent because I haven't owned a car in a easy seven years. So going to be a little while, but you know what, a lot of people these days are really looking into it when you consider trepidation over using public transportation or flying or anything like that. I've certainly rented a couple cars during the pandemic.
Ryan Ermey: So let's get into it. What is the sweet spot would you say for buying a used car? Do you want something that's practically new, or are you better off with something a little bit older?
David Muhlbaum: Well, there are a ton of it depends here, and I always a little loathe to trout those out. But it's hard to get around them. There are just as many different cars as people, and plus, the car market is all kinds of crazy right now because of COVID. There's been a shortage of new cars because of production disruptions, and demand for used cars has shot up, as you mentioned, in part because people don't want to ride public transport anymore or they're anticipating that they're going to have to do something different and they need a car for that.
David Muhlbaum: So there was an initial drop in used car prices in the spring, during the beginning of the freak out if you will. But that has now turned into higher prices across the board for used cars, particularly trucks. Now these market variations, they don't matter all that much to the individual shopper because when you need a car, you need a car and you need it now or close to now.
David Muhlbaum: So your question, what's the sweet spot. I mean, again, it depends on the model. But we do see some trends. If you're looking at a car from . . . if you consider the total five year cost to own, financing, depreciation, maintenance, gas, those sorts of things, it often makes more sense to actually buy some cars new. These tends to be cheaper cars with good reliability records that don't depreciate quickly. So Honda Civic, Toyota Tacoma, Subaru Impreza. Now part of the savings here comes from the fact that newer car financing usually has or almost always has a lower rate than you can get on used car financing. But because of those production shortfalls, you might have a hard time finding the exact car you want new.
David Muhlbaum: Now the flip to that is that more expensive stuff, BMWs and Audis and such, these cars depreciate much more quickly in part because they're expensive to repair. So the money smart way to get into one of those -- if you intend to keep it -- is to buy one coming off lease, three years old, preferably from a manufacturer certified preowned program. That will give you the extended warranty and the peace of mind to essentially take that gamble.
Ryan Ermey: You talk about a gamble and I think everyone's uncle or something has a horror story about buying used car and then it breaks down immediately. So even if you save by buying a used car, you can end up obviously washing out your savings with maintenance costs down the line. So how can someone who's shopping for used car go about making sure that they're getting a reliable vehicle?
David Muhlbaum: Yeah. Yeah. The horror story from the uncle or the neighbor or some guy like me about experience with brand X or car Y tends to have an outside weight on people's decision making I think. But that might be because the real way to find out is tedious and uncertain. It's just homework. Homework, homework, homework. Researching online. Consumer Reports is a very good resource. You have to pay for it. Another approach for free is to look at JD Powers Quality and Reliability Reviews. Notably they tend to look at newer cars or when people are new to the car, like the first 90 days or the first three years. So if you're looking at an older car, you kind of have to extrapolate.
David Muhlbaum: But one of the best ways to research like "Is this car going to be reliable?" and "Is this car not going to cost me an arm and a leg in the long run?" is this metric that one of my sources at Edmund's suggested to me. Once you've picked up a couple of models, look at what's actually for sale. Even if they're older or older than what you're particularly looking at, do you see one's for sale with really high mileage, like 200,000K, maybe more? Basically that means those cars last. If they're available at that kind of mileage, that means they made it that far. One of the flip parts too is if they're still commanding a decent price at that mileage, that also indicates they're reliable.
Ryan Ermey: So if I go about narrowing things down maybe to a model, maybe to a couple of models and a couple of years that I'm looking at, how can I go about determining a fair price given what the car is, what the model year is? Is there a rule of thumb for this?
David Muhlbaum: Yeah, there's a lot of research for it. There are a number of websites that essentially if you can give them the VIN, the car's vehicle identification number, you can run price reports on it. KBB, Edmund's and Car Gurus are some. Now I suggest you do all of them, because the prices will vary in part because there's a degree of subjective judgment involved in rating a used car's condition. But knowing what the range is, knowing what these prices are will help you immensely in knowing whether what you're looking at from whoever's listing the car is a fair asking price, and then well, knowing what you should offer or settle for.
Ryan Ermey: Well, and that goes right to my next question -- is it worth it to haggle or do we recommend people go with one of these no haggle car buying services?
David Muhlbaum: That's a very personal question. No, no. I don't mean I'm offended. I mean, it depends on what kind of person you are. If you really hate haggling, the fact that there are many big vendors both online -- Carvana -- and in person -- Car Max. I'm just giving a couple examples. Who have no haggle policies. That's a huge relief. Now will you pay more than if you're a good haggler and knows not to pay the asking price at the used car lot or who's willing to swap texts with a stranger on Craigslist? Yeah, probably. But neither is wrong. If haggling is your skill, use it. If you hate it, you're paying money for that. But that's probably worth it.
Ryan Ermey: Yeah. Well, and so the last thing I wanted to ask you about, and I actually did consult with you a little bit behind the scenes when I was doing a segment on buying from government auctions for repo and . . . Sandy and I were joking that they were all forger drug dealers cars.
David Muhlbaum: You get to sniff the carpets.
Ryan Ermey: So we decided that that was likely not a good option for most people, but you do note in a story that is up online at Kiplinger.com and that we'll put in the show notes that it might be a good idea for someone to consider buying a former rental car. Now do we still think that's generally a good idea, and what kind of goes into that?
David Muhlbaum: Yeah. Well, this is actually a bit in the news right now because Hertz as part of its bankruptcy has been ditching quite a few of its fleet or cars from its fleet at generally pretty good prices. The discount has varied in part because, as I mentioned, the used car market is going up right now. But anyway, the fundamental question is should I buy a used rental car? And sometimes people are fearful because it's been driven by . . . well, it's driven by a bunch of strangers. But I would contend most people don't abuse cars, and when you blend that risk in of having many people have driven it for short periods of time, it just vanishes. The other fundamental thing is they're well maintained because they're following the factory schedule while they're under the roof of the rental car company, and basically sold for substantially below market value.
David Muhlbaum: In my case, I took my own medicine this summer. I bought one. I bought a used VW Golf from Hertz. The price was good. The car was new enough that I figured it hadn't been too beaten down. And also the defects that made it cheaper, like paint chips and mungey upholstery, that's the sort of stuff I can easily fix myself.
Ryan Ermey: It's replaceable, yeah. The Golf, I'm not mistaken, is a car guy's car. I seem to remember that Motor Trend . . . I used to read Motor Trend anytime I went to the dentist or whatever. Before I could actually drive a car, I would read the magazines about all the cars that I would never be able to afford at 16. "Mom, can't you buy me a Golf GTI?"
David Muhlbaum: Oh yeah.
Ryan Ermey: "BMW M3, wouldn't that be reasonable?" Are you liking it? Is it a good car?
David Muhlbaum: Well, the GTI was the car I wanted back in high school too, but no, I didn't get one. This was actually my second Golf. I had bought one new, and this one was meant to be for the kids to drive. I wanted something new and relatively safe for them, and yeah, it's nice to have a driver's car. It's also exemplary of what you can find in a used car fleet. They're not all just white Chevy's and Toyota's anymore. There's a good range of cars out there.
Ryan Ermey: All right. Well, make sure to go on Kiplinger.com. Go in our show notes. Check out all of David's advice. We didn't have time to get to all of it here, but check out all of his advice on buying a used car. Yeah, enjoy that Golf. Sounds fun.
David Muhlbaum: Thanks.
Ryan Ermey: After the break, find out who I rated as the top online brokerage for 2020. Come right back.
Ryan Ermey: We are back, and before we go, I wanted to talk about one of my stories now that David has been interviewed about one of his. And it is the the online brokerage rankings. Now, David, you did have some experience chopping this up and uploading it to the web.
David Muhlbaum: Yes, I have mangled it.
Ryan Ermey: Not so much.
David Muhlbaum: Okay.
Ryan Ermey: So it's available online. It'll be in the show notes and the story in its entirety is in the October issue of Kiplinger's Personal Finance. And I actually talked about this story on the podcast last year. I ranked the brokerages based on seven categories. 5% of the scoring belongs to fees, 20% investment choices, 25% mobile, 12.5% each for tools and research, 15% advisory and 10% user experience. So it is a long, arduous process on Microsoft Excel, but I did come out with a winner and that was Fidelity. Now this isn't me saying that Fidelity is necessarily the best brokerage for you. But it's the best we think for the broadest swath of investors. But I wanted to get into a little bit about how the scoring broke down between the different categories. So is there one that you'd want to hear about first here, David?
David Muhlbaum: Well, I noticed the percent that's attributed to fees is lower this year, isn't it?
Ryan Ermey: Yes.
David Muhlbaum: I presume that has to do with the fact that those are lower, too.
Ryan Ermey: Yeah. So the seismic news in the brokerage world over the past year and really it was like a month after our last rankings went out, virtually every major brokerage eliminated commissions on stock and ETF. Stock and ETF trades and the base commission for options trades. So pretty much everybody went to zero, which mean that fees are we reckon less important in terms of choosing a brokerage for the average person. But also a little bit trickery to separate the brokerages on.
Ryan Ermey: In this case, what set the high scoring brokerages in this category apart were the ability for customers to pay low prices for bonds and to trade on margin cheaply. Interactive Brokers were big winners on both of those counts. They're the light version of their brokerage, which is what most nonactive traders are going to be using and where they offer their free trades, charges 2.58% to trade on margin regardless of an investor's balance, which is just really, really low. I mean, if you look at what other brokerages charge, a lot of them charge more than that, even for ultra high net worth people. And for regular people, you're going to be paying a lot more. For instance, Merrill Edge charges 8.63% to people with balances of less than $25,000.
David Muhlbaum: But in a way, the question of the interest rate on the options is it kind of cuts a line in the middle of the field because there's only a certain percentage of people who do that.
Ryan Ermey: Yeah, and we took other parts of this scoring, other metrics into account. The other big one when it came to fees was I still did want to measure how cheaply people could trade stocks. That doesn't necessarily mean commissions because there are hidden costs. There are brokerages that collect money for selling investor order flow to market makers. There are a few Fidelity, Merrill Edge that don't do that. And we also measured execution speed and how much price improvement investors could get on a particular trade. So all of those factored in to our fees scores. Interactive Brokers finished first, followed by Merrill Edge and Fidelity.
David Muhlbaum: Yeah. I'm also thinking there are people out there who are like, "I don't do any of that," who are listening to our advice about investing in the Kiplinger 25 Mutual Funds, et cetera. And they want to know . . . they don't want to trade. They want to get advice and invest in mutual funds and ETFs and make sure they're properly diversified. So who did that best for that kind of investor?
Ryan Ermey: So for investment choices, virtually all of the brokerages on our list offer thousands of mutual funds that users can buy with no load, which no sales charge and no transaction fee. Interactive Brokers, TD and Schwab all have more than 4,000 such mutual funds available. Fidelity and E-Trade clock in in the high 3,000. So there are plenty of places that investors can go to buy mutual funds. Fidelity wins here thanks to the breath of its bond offerings for one thing, both new and secondary issues were counted for those of our readers for whom buying bonds is important.
David Muhlbaum: Buying bonds individually.
Ryan Ermey: Correct. And Fidelity also offers the most IPOs to individual investors. So these are things that make up a small part of the score. The only other thing to note here for E-Trade investors, they did report the highest number of highly rated funds that were offered with no transaction fee. So we tested for quantity as well as quality. So funds with Morningstar ratings of three stars or better. E-Trade has the most of those available for free to its clients.
David Muhlbaum: Okay. So where's Robinhood?
Ryan Ermey: So I wrote a little bit about Robinhood in this package, but it didn't make our actual ranking because it didn't meet our criteria for entry. In order to be included in our ranking, a brokerage had to offer stock and ETF trading, which Robinhood does, but also, mutual fund and bond trading. And what's more, Robinhood has become a very big deal in terms of the number of trades on the platform. But it's also had its share of issues, both with outages and crashes and with people running into issues with the options trading functionality going way into the negative. When things were really, really volatile, people were really piling into the platform, doing a lot of active trading. The platform crashed multiple times.
Ryan Ermey: And then one young man who-it was really quite unfortunate-ended up taking his life. In his note, he detailed that he had accrued an enormous negative balance or he thought he had anyway while trading options with Robinhood. And Robinhood is working with legislators to try to refine its options functionality so fewer novices can trade on the platform. So there are fewer people essentially not knowing what they're doing while trading options with Robinhood.
David Muhlbaum: Yeah. That was a sad story.
Ryan Ermey: So back to the ranking here, let's see.
David Muhlbaum: You had mentioned the Excel spreadsheet. But did you have the download? Did you have to install an app for each one of these?
Ryan Ermey: Oh, absolutely. And that goes to two of our scoring systems here. So we do assess every mobile app that's available, but our mobile scoring is more of a collection of do you have this, that, or the other? Because we send surveys out to all of these brokerages.
David Muhlbaum: Mm-hmm.
Ryan Ermey: Asking them about all of the different functionalities that they have available in their platform. So the mobile is a tally of features we think investors want, and E-Trade who revamped their app in the last year really just checked just about every box that we asked for, including real time streaming quotes, mobile check deposit, customizable views.
David Muhlbaum: Oh yeah. They flew up in the rankings, didn't they this year? E-Trade . . .
Ryan Ermey: They really did. I mean, they really improved their app. Interactive Brokers scores well, as well because it is the only firm to offer stock, bond, mutual fund, and bond trading on its app. Most apps don't offer bond trading. But we also in terms of actually getting on the 11 apps that I had on my phone to rate user experience, me and our crack team of investing writers went on the websites, went on the apps, and just tested them for how well they functioned, how easy it was to find things, how easy it was to come up with investing ideas.
Ryan Ermey: Merrill Edge scores tops for our user experience. The story modes, which they have for portfolios and different kind of investments, funds and stocks really give you a lot of good information presented in the form of questions and answers on the website and on the app. We found it incredibly useful. They also have an idea builder tool, which helps you find stocks based on various themes. And browsing through it, it's almost like Hulu or Amazon Prime Video or something. It's presented in a really slick and intuitive web.
Ryan Ermey: And then I guess the last things we'll touch on here because we are running a little bit long, tools and research. We like Fidelity for tools. They have a ton of investor events and webinars and really the most powerful and comprehensive screeners for stocks, ETFs, preferred stocks, and mutual funds among the ones that we tested. TD Ameritrade certainly scores points for investor education. They have a ton of videos on their YouTube channel. They also have their own broadcast network that streams every day on their site.
David Muhlbaum: Yeah. You could just basically spend your entire day soaking up the media.
Ryan Ermey: Passively. Right, yeah. It's really impressive. For research, we favored firms that had a lot of sources of research but also really tilted towards ones that had robust research written in plain English by expert analysts. So we favored qualitative rather than quantitative research. Schwab and Merrill Edge were the top scorers for that offering reports from Morningstar, CFRA, and Argus and Big Banks, Credit Swiss in Schwab's case, and BofA Securities for Merrill Edge.
Ryan Ermey: And the last thing worth mentioning is advisory services. Now we asked every brokerage the kind of advisory services that they offer to high net worth clients, and those factored into our score. But for the layperson, we were more interested in the robo advisories. And Fidelity once again wins based on cost. Their robo advisory is as cheap as it gets, especially for people who are starting out. If you have less than $10,000 in your account, you pay no fee to open a Fidelity Go account. Getting started costs only $10. And because the robo portfolios are... The underlying funds of those portfolios are made of the Fidelity Zero funds, which don't charge expense ratios. You basically have an entire robo advisory service for free.
David Muhlbaum: Yeah, and I think it's also important to remember that for some people, they'll be like, "Well, robo. I just don't want AI to do it." But the reality is is that there was not independent financial advice for people at that investment level before.
Ryan Ermey: No, and not only that, for a lot of these, and this is worth delving into. A lot of them now offer a hybrid model where you can get not only the algorithmic stuff that you can get for the basic robo advisory service but for a little bit more money, you can have access to a CFP who's holding your hand along the way.
David Muhlbaum: Right. So if the robot helps you do a good job, you get a human.
Ryan Ermey: Right. Exactly. So make sure to go check the whole story out. This is only really scratching the surface. It is a big spread as David knows from having to chop it up for the website. We have details for how the scoring went in all of the categories as well as brokerages ranked for different types of investors. So be sure to check it out. It is on newsstands now in the October issue of Kiplinger's. And we will have it up on the website.
Ryan Ermey: As far as substitute teachers go, David, you've done really well. Maybe you could do a Joan Rivers thing where you come on every fifth show or something and cover. What do you think?
David Muhlbaum: Oh, Joan Rivers. Yeah, okay.
Ryan Ermey: Rest in peace.
David Muhlbaum: Yeah.
Ryan Ermey: All right, until next time, David. Thank you.
David Muhlbaum: Thank you.
Ryan Ermey: That's it for this episode of Your Money's Worth. For show notes and more great Kiplinger content on the topics we discussed on today's show, visit Kiplinger.com/podcast. You can stay connected with us on Twitter, Facebook or by e-mailing us at firstname.lastname@example.org. And if you liked the show, please remember to rate, review and subscribe to Your Money's Worth wherever you get your podcasts. Thanks for listening.
Links and resources mentioned in this episode:
In his former role as Senior Online Editor, David edited and wrote a wide range of content for Kiplinger.com. With more than 20 years of experience with Kiplinger, David worked on numerous Kiplinger publications, including The Kiplinger Letter and Kiplinger’s Personal Finance magazine. He co-hosted Your Money's Worth, Kiplinger's podcast and helped develop the Economic Forecasts feature.