As you approach your retirement years, you will need to make a number of critical financial decisions, such as whether to invest or pay down debt. Another issue that you need to think about is housing.
Many retirees assume that owning their own home is the best course of action because it can cut down on their monthly expenses. Of course, individuals who have already paid off their homes will have the benefit of avoiding monthly payments outside of property taxes, but in some cases, they may be better off selling it and renting. Similarly, people nearing retirement who still have a mortgage could benefit from renting instead.
While the Harvard Joint Center for Housing Studies found that about 80 percent of individuals 65 or older are homeowners, homeownership comes with a lot of responsibility and limits flexibility, which is why renting could be the better option.
When you rent, it is much easier to downsize when appropriate or relocate for better weather, closer proximity to family, or a cheaper cost of living. Putting a home on the market involves a lot of time and significant expense, making it much more difficult and expensive to relocate on a whim.
The Financial Impact of Renting and Owning a Home in Retirement
Today, more seniors are choosing to rent than own due to finances. When considering whether to rent or own, you should look at the cost of renting versus owning where you live. In many cities, it is actually cheaper to rent than to pay a mortgage (although it is important to consider rent increases when you are calculating this option). In this case, you can actually significantly boost your savings by cashing in on the equity in your home and renting instead. The profits from selling a home can make it easier to reach your financial goals, such as delaying Social Security benefits until age 70 to get locked into the highest rate.
Additionally, the first $250,000 in capital gains from the sale of the home you have lived in for at least two of the past five years does not get taxed. This exclusion is doubled for married couples who file a joint return. This money can help assuage some fears about running out of money later in life and serve as an important buffer.
At the same time, you need to consider the market. Selling a home in a down market limits returns, so it can be smart to wait, if possible.
The Hidden Costs Involved with Homeownership in Retirement
Another factor that you need to consider is the hidden costs of homeownership. As you prepare to retire elsewhere, you may be thinking about selling your current home and buying a new one—which comes with two rounds of closing expenses.
Even when you own a home without a mortgage, the costs of ownership can creep up on you. In addition to property taxes, you will need to cover the costs of insurance and maintenance, the latter of which can quickly add up, especially for older homes. Also, you can lose track of how much you spend on home maintenance since it is not a fixed monthly expense, so getting a clear sense of how much to budget can be difficult. A decent rule of thumb is 1 percent or 2 percent of the home’s value with annual adjustments for inflation. This is where it pays to rent—renters don’t have to worry about this unknown expense.
Retirees also need to take property taxes seriously. These taxes vary wildly between different jurisdictions and can increase sharply in certain areas. Furthermore, starting in 2019, the IRS set a $10,000 limit on state and local tax deductions, which includes the property tax. People approaching retirement who saw their tax bill rise as a result of this new rule can improve their after-tax cash flow by selling and then renting. Also, 2019 introduced a new standard deduction of $12,200 for single filers and $24,400 for couples. This new tax rule makes it more difficult to deduct mortgage interest than it was in previous years.
The prospect of buying a home in retirement also involves a fair amount of risk. You should avoid carrying a mortgage that consumes a massive chunk of your guaranteed income. You could also feel forced to move at any point, especially due to changing health situations. Being forced to sell soon after buying or during a downturn in the market may mean that the resale price will not actually repay the mortgage, especially due to sales commission.
The Appeal of a Low-Maintenance Lifestyle for Retirees
When you retire, you can simply send a text to a landlord when something breaks rather than worrying about how you will cover the cost on a fixed income. When you rent, you will always know how much you need to budget, and you will not easily get caught off guard with unexpected hits to your budget. Beyond the expense, being able to physically handle things like household repairs becomes more difficult over time, and so you may find yourself calling professionals instead, which involves even more money.
Furthermore, maintaining a home involves a lot of work that you may not simply feel up for as you get older. Everything from gardening to cleaning takes time, and these tasks become more difficult when you live alone or lose a spouse. While you will have to clean and possibly garden when you rent, you can more easily relocate if you need to downsize. When you own a home, you likely will not have the financial ability to relocate quickly or easily. Renting lets you downsize easily and see how the new space works for you. Renting also makes it easier to “test drive” a new city or neighborhood.