Should Retirees Rent Or Own?
Whether to rent or own after retirement is a big decision that should not be taken for granted as we near retirement age. Either option can affect your financial security depending on where you live and your specific retirement needs.
Many fee that with today’s escalating real estate prices, it may be worth it to make sacrifices now in order to own a home. However many nearing retirement are afraid to dip into their retirement money to make such a purchase.
But the reality is that many older homeowners are faced with these decisions, and 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 maintaining a home. Others need access to their home’s equity in order to maintain a lifestyle in retirement. Some 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 home ownership is costlier and more work than many people realize, so the option of renting after retirement makes a lot of sense for some.
If you are nearing retirement and have been renting most of your life, buying a new home just before retirement will not make financial sense.
Home ownership has many positives, but it can also be quite expensive. 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 general upkeep.
The big disadvantage of 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, here as the cost of an apartment can double in 20 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, you should 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.
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 truer 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.
Plan ahead. Before retiring, consider refinancing your mortgage. You can spread out your mortgage over a longer period of time. Remember, 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.
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.
So what should I eventually do? Estimate your retirement budget with and without the home purchase. Where will the money come from to pay your housing expenses? Rents will go up (about 3 percent, currently) but, for homeowners, so will insurance, taxes and upkeep costs. If you can pay cash for a house or condo and still have plenty of money to live on, you’re a good candidate for buying. But if home owning strains your lifestyle — even if you conserve cash by taking a new mortgage — you’re a candidate for renting.