Should You Rent For Retirement?
Owning your home after years of sweating to pay off the bank is sweet. But is it a good idea to stay in that home throughout your retirement? Many retirees elect to downsize, buying a smaller home or condo. Some are renting and investing the money they receive from selling their home, or avoiding homeownership altogether.
“I am a 75-year-old woman who rents a two-bedroom apartment in a four-unit apartment building,” says Emily Kimball, motivational speaker and owner of The Aging Adventurer in Richmond, Va. “I feel much more comfortable paying rent and having their handyman come and solve my maintenance problems. I have assets but they are for future health problems or more travel and adventure.”
When deciding whether to stay in your present home or move and buy or rent, you need to take two factors into consideration: finances and emotions. Renting may make economic sense, but if a great deal of your emotional security comes from the stability of owning your own home, it may make sense to own. On the other hand, if you’d rather live without the headaches of maintaining a home, renting may have more appeal to you.
Conventional wisdom and the real estate boom of the past few years have fostered a mentality that your home is a good investment, one that can help finance your retirement as certainties around company-financed pensions and the viability of Social Security have faded. Unfortunately, it’s not true.
While a home provides a roof over your head and limited appreciation potential, a study by the Fidelity Research Institute reveals that home prices have risen on average by 5.9 percent on an annual basis since 1963. Home prices are certainly capable of sharp run-ups in values, but they also tend to decline as well, sometimes for long periods.
A home is not only expensive to maintain, but mortgage interest costs add hundreds of thousands of dollars to your homeownership bill, ultimately cutting whatever profit you might receive when you sell. The mortgage interest deduction does offset some of those interest costs and mortgage fees, but not as much as you’d think. When calculating the potential profit from selling your home, don’t forget to deduct ongoing expenses, mortgage interest, property taxes, insurance, maintenance, major repairs and renovation projects.
If you’re not sure which way to go and are determined to sell your house, Mike Dorula, CPA, recommends renting on an interim basis, which is especially useful for retirees who want to relocate to a new community. “Many seniors, who are considering moving to a specific retirement community or to a new area, rent first to make sure they like it,” he says. “My sense is that renting is cheaper in the short run, but more expensive in the long run.”
This approach can work to test the waters of renting in general to see if it’s for you. But before taking the plunge of renting, either on an interim or permanent basis, make sure to factor in all the costs of renting. Many would-be renters forget to include renters’ insurance, security deposits and extra fees for covered parking spots and other amenities when they make their cost calculations, says Marion Somers, a geriatric care manager in Brooklyn, N.Y. known as Doctor Marion.