Whether to rent or own in retirement is a big decision that should not be taken lightly. Either option could help or hurt your financial security depending on where you live and your specific retirement needs.
When you think of someone considering whether it is better to rent or own, your first thought might be of a younger first-time homebuyer. With today’s sky-high real estate prices, many think it is worth it to make the sacrifices necessary to own a home in places like L.A., Seattle or San Francisco.
The reality is that many older homeowners are grappling with this issue, as well, but for a variety of different reasons. Some have mortgage payments they couldn’t afford if they stopped working while others simply wish to forgo the hassles of home maintenance. Others desperately need access to their home’s equity in order to afford basic necessities needed in retirement. A few may be looking to downsize, or right size, their home for a more joyous retirement while others might be planning to move. The bottom line is that homeownership is costlier and more work than many people realize.
If you are nearing retirement and have been renting most of your life, running out and buying a new home will likely not make financial sense. On the other hand, if you have owned your home, you may be shocked by what it costs to rent a lower-valued home in your current neighborhood. This is a major decision that should not be made on a whim. Here are a couple of areas to consider when making the decision of whether to rent or own a home in retirement.
Tapping into Home Equity
If a 30-year-old asked me if her home was an investment, I’d suggest that she think of it as a place to live. However, if a 55-year-old asked me about using his home equity as part of his retirement plan, the conversation would be quite different. We would discuss what tapping his accumulated home equity could potentially mean for his retirement. Along with the ways he could potentially turn his home’s equity into additional retirement income.
In order to use your home as part of your retirement income strategy, you must be willing to tap into its equity. That could mean carrying a mortgage into retirement, selling the home, renting the home or possibly taking a reverse mortgage. fAll of these options have various pros and cons associated with them.
For some, keeping the house may be the best route especially if they have a low tax base and small mortgage. For those who may have purchased more recently, or who don’t have much equity, they may need to sell in order to have any chance of not going broke later on in life.
Other considerations include whether or not you will be able to age in place in your home, if there is a bedroom and bathroom downstairs and if you have common ailments such as knee or hip pain, the ability to go up and down the stairs. A desire to keep the home, pondering a move and easy access to adequate medical care are additional things to consider.
In other scenarios, selling the home may be the only option because a large number of baby boomers have not saved anywhere near enough for retirement. This is especially true when home equity isn’t considered. Many are also living much longer than expected and past ages of previous generations. While money may be okay early on in retirement, many have failed to realize that the last few years are often the most expensive years of life. Because of this, a home’s equity could be used during these years for those who are lucky enough to live longer than expected. The equity could also be used to help cover unexpected, or extreme, medical costs or an impromptu Long-Term Care “Insurance” for a spouse.
Asset or Pain in the Butt?
Homeownership has many positives, but it can also be quite a pain in the butt. You are responsible for upkeep, taxes and everything else whereas renting offers more flexibility and less responsibility. When renting, your landlord is responsible for repairs, yard maintenance and even things like shoveling snow. I’ve never shoveled snow but it sounds miserable and cold.
The big disadvantage for renters is the increasing cost of rents over time. A homeowner essentially has a fixed cost of living assuming they keep the same mortgage. They will also be accumulating equity over time as they pay down the mortgage and if the property appreciates in value. Even with rent control (for renters lucky enough to have this protection) limiting increases to three percent per year, the cost of an apartment can double in 24 years. Small rental increases can be devastating for those on a fixed income, and large rental increases may be impossible to overcome.
If you are nearing retirement, look to spend 30% to 40% less on rent than what you spent on your last mortgage payment. Ideally, you would not spend more than 15% of your annual income on housing, if renting. That percentage can be closer to 25% if you are owning, especially if your mortgage will be paid off during the earlier years of your retirement. I realize putting this little of your income towards housing may not be doable for many retirees, but a lower cost of living will greatly decease your chances of running out of money in retirement. Not to mention free up funds for other things from travel to healthcare.
If you are planning to move in retirement, consider how long you plan on staying in your new place. If your time frame is less than five years, you will often have a tough time recouping the costs of purchasing and selling the home. This is true when the real estate markets are hot and even more true when they are not. The shorter your time frame, the more likely you should rent.
Buying may be the better option for those planning to stay in the same home for 10 years or more. Even if you have the cash to purchase a home outright, consider getting at least a small mortgage or home equity line of credit. This will allow for the most financial flexibility later in life.
I’m an optimistic person, but I think getting a mortgage is a huge hassle. You will not want to endure the process while, at the same time, dealing with a major health issue. It can also be more difficult to qualify for a mortgage later in life. Additionally, the new Trump Tax Plan has changed the tax deductibility of mortgage debt not specifically obtained to purchase or improve the home.
Things to Do Before Retiring
You don’t want to be in a position where you have to sell your home because you are out of money. Real estate is hot right now, but it may not be when you are forced to sell. You may also have to take a lowball offer if you are desperate.
Plan ahead. Before retiring, consider refinancing your mortgage. You can spread out your mortgage over a longer period of time. One of my clients, who is 80 years old, refinanced into a new 30-year mortgage with no intentions of ever completely paying off his home. In this case, he has a small mortgage relative to his Social Security and pension income. I mention this because getting approved for a mortgage, without a job, is much more difficult, so consider refinancing or getting a home equity line of credit before retiring.
There is a trend among retirees to downsize in square footage rather than price. Doing so may prove to be quite costly once real estate fees, capital gains on the sale of the former home and moving costs are factored. If you can afford moving to a nicer, smaller place to enjoy your golden years, more power to you. On the other hand, it doesn’t necessarily help you save money
If you own a larger home and want to remain there, consider a Golden Girls type of arrangement. You will lower your overall cost of living and have built-in friends. Also, cable and internet cost about the same whether one of four people live in your home. If you remember the ’80s sitcom, getting roomies was how Blanche Devereaux (Rue McClanahan) was able to stay in her home. She also ended up with three new lifelong friends.
Owning a home is still part of the American Dream that many retirees have a tough time abandoning. Think long-term when deciding to rent or own in retirement. The decision is a bit easier if you are already renting or already owning. Sticking with the status quo is always easiest. Make a sustainable choice to avoid stressful and rushed choices down the road, when fewer options are available.
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