Should You Own or Rent a Home in Retirement?

by Rick Pendykoski | Published: Oct 21, 2020

For new retirees, answering the question "is renting better than owning in retirement?" is a big decision that requires some thought. Making the wrong decision can hurt your financial security which is essential when relying on retirement savings.

If you've been renting all your life and are nearing retirement, using money from your 401(k) to pay the down payment for a house doesn’t make sense. When you withdraw money from your retirement accounts, it doesn’t automatically grow back, and you end up risking your financial security.

On the other hand, if you own a large home and want to buy a smaller one now that you're an empty nester, you need to decide whether buying a home or renting one will make better financial sense.

In retirement, housing is probably your biggest expense. Answering the question "is renting better than owning in retirement?" is a decision that can’t be made on a whim. So, how do you decide what your best option is? Analyze the pros and cons of both below and then decide.

Note: If you are looking to buy a house as an investment (for rental income) and not for residing in it, then you can consider using a self-directed IRA or Roth IRA to invest in real estate. 

Owning a home when retired

Advantages 

  • Buying a smaller, less-expensive home, especially after selling your family home, cuts down your expenses and you can invest the profits from the sale elsewhere 
  • A landlord can't increase your rent or terminate your lease
  • You can renovate or decorate the house to your taste 
  • You can leave the home as a valuable asset to a family member, friend or charity

Disadvantages

  • Your money is inaccessible and can’t be accessed at will
  • Maintenance can be costly 
  • Depending on the city, buying a house can be expensive 
  • If you don’t expect to reside in your new residence for long, owning a home becomes financially less attractive 
  • You’ll have to pay insurance and property taxes
  • Your home may not be as valuable you think. You could find a cheaper rental and use whatever money you have as a source of income or a potential gift to someone
  • If you need to sell your new home, you have to rely on buyers, realtors and market conditions. Plus, it’s time-consuming and takes a lot of effort 

Renting a home in retirement

Advantages

  • Your only housing cost is the rent and utilities
  • You're free of maintenance responsibilities as those are the landlord’s problems to worry about
  • You have the flexibility to pick up and move when your lease term is complete 
  • You can experiment with living in different homes within different locations and ultimately choose what fits you best
  • You could use the expendable cash to build your nest egg or boost your finances 
  • You don’t need to worry about market conditions or liquidity
  • With your extra money, you can spend it on vacations and other things you have always wanted to do 
  • Being a tenant is excellent if you plan to travel or need immediate funds to treat medical issues

Disadvantages

  • Paying rent is an expense that tends to increase over time
  • In many cases, you can’t renovate a rental home 
  • When renting, a landlord may not fix maintenance issues as promptly as you’d like
  • If you have pets, it might be difficult for you to find a rental that allows them

How to decide

The steps below can help you come to a decision. 

1. Calculate your monthly cash flow 

2. Weigh the pros and cons of each option

3. Compare the costs involved in buying a home vs renting a home. Factor in utilities, maintenance costs, insurance and property taxes 

4. Figure out how much this money could increase if you had the opportunity to invest it instead of holding it in home equity 

It’s up to you

For many people nearing retirement, deciding to keep or sell the family home, rent a home or downsize to a smaller property is a difficult decision. The best route is to weigh the pros and cons, calculate the cost of each option and then decide. If you need assistance answering the question "is renting better than owning in retirement?" consider working with a financial advisor to review the pros and cons of being an owner versus a renter and the impact it may have on your retirement savings.

Categories: Renters

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