As you near retirement, you may wonder: Should I rent or own? Which is the best financial decision? With today’s home prices soaring and the highest mortgage rates in nearly 20 years, buying your retirement home may be a disaster for your financial security. On the flip side, if you plan to retire in your current home, we should have a completely different retirement-planning conversation.
Some retirees will need to reduce the costs of their housing. Others may want a fresh start in a new location after retirement. At some point in retirement, you may not want to deal with all the hassles (and costs) of maintaining a single-family home. Sadly, with so many people behind in saving enough to keep their living standards in retirement, access to home equity may be necessary to fund their retirement lifestyles.
For our readers currently renting and nearing retirement, running out and buying a new house now would likely not help you reach your goal or retire faster or easier. For homeowners, you may be shocked when you see what less-desirable apartments are renting for these days. Moving after retirement is not a decision you should make lightly. It is one thing to be housepoor in your twenties. It’s a whole different struggle once you’ve retired.
Here are a few areas to consider when deciding whether to rent or own a home as a retiree.
Will You Need Access To Your Home Equity?
A home is often most peoples’ most significant asset. Even if your mortgage payments are low (or nonexistent), there is still a cost to sitting on that home equity. What would your retirement income look like if you could turn your home equity into retirement income?
To use your home as part of your retirement income strategy, you must be willing to tap into its equity. This could mean carrying a mortgage into retirement, selling your home, renting out your home, or possibly taking a reverse mortgage. All 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 a small mortgage with historically low-interest rates. Those who may have purchased more recently or don’t have much equity may need to sell to reduce their cost of living in retirement.
A friend loves to say, “The only way I will leave this house is feet first.” She has a one-story home that she hopes never to leave. Think about whether you will be able to age in place in your current home. Do you even want to stay in the same city or state?
Will You Need To Sell Your Home To Retire?
Many baby boomers have homes they won’t be able to afford in retirement. Selling may be the best option to rightsize their housing costs once they retire. The good news is that many baby boomers will live much longer than expected. The bad news is that their retirement savings will also need to last much longer as their longevity increases.
Is Owning A Home An Asset Or A Hassle?
Yes, homeownership is an achievement and something to be proud of. At the same time, it can be a big responsibility or even a money pit. Live there long enough, and there will always be needed repairs, replacements, and maintenance costs, not to mention property taxes, which, thanks to the Tax Cuts and Jobs Act of 2017 (Trump Tax Plan), are not fully deductible for many California homeowners.
Renting can be cheaper, especially in the short run. However, the big disadvantage for renters is the increasing cost of rent over time. Let’s be honest: if you start renting in your seventies or eighties, inflation and rental increases will be less of an issue over your lifetime than for someone in their twenties or thirties.
How Much To Spend On Housing In Retirement
Whether planning to rent or own in retirement, strive not to spend more than 30 percent of your income on housing costs. In a perfect world, this number would be closer to 15 percent, allowing for the most disposable income to do everything you dreamed of doing after you’ve retired. You can likely push your housing costs up if you own your home, and the mortgage will be paid off in the early retirement years.
I realize putting this little of your income towards housing may not be realistic for many retirees in high-cost-of-living cities like Los Angeles or even Palm Springs. Still, a lower cost of living will significantly decrease your chances of running out of money in retirement, not to mention free up funds for other things like traveling and maintaining your health.
Related: How To Keep Healthcare Costs In Check During Retirement
Are You Planning To Move In Retirement?
If you plan to move in retirement, consider how long you plan to stay in your new home. The shorter your timeframe, the less advantageous home ownership will be.
If your timeframe is less than five years, you will often have a tough time recouping the costs of purchasing and selling the home. This is true even when the real estate markets are hot and even truer when they are not. The shorter your timeframe, the more likely you will benefit from renting as a retiree.
Buying may be better for those who expect to stay in the same home for at least 10 years. Even if you have the funds to pay cash for a home, consider getting at least a small mortgage or home equity line of credit. This will allow for the most financial flexibility as you age.
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 during your retirement years. The decision is a bit easier if you are already renting or 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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