Better To Rent or Own in Retirement? 5 Things to Consider
What makes more sense when you’re over 65, renting or owning your home? The math is changing according to many financial advisors.
A number of factors make a difference. Consider:
- Age. People have strong feelings when it comes to home ownership, but when over 65, renting can be a less expensive choice, and may be the better choice if Social Security is the largest share of your income. Even when you have other income in addition to Social Security, like a job, pension, or sufficient savings, and your home is paid off, you still need to budget for rising real estate taxes, homeowners’ insurance, repairs and maintenance. Think carefully about a conventional mortgage after starting benefits. Unless you have a lot of savings and other assets, a conventional mortgage may put you at financial risk if home values dip or other costs rise faster than your income.
- Couple or single? Your marital status may increase your need for space, and can keep repair costs lower, if you or your spouse or partner takes care of some of the home maintenance and repairs. Consider though, how ill health or the death of a spouse might significantly change those costs in the future.
- Income. Even if you own a home outright, you need to budget about 1- 2% of your home’s appraised value for annual maintenance and repairs. If your home has grounds and shrubs, consider how long you will be able to maintain your own yard. It’s a good idea to include those costs in your maintenance estimates. You will also need to plan for major jobs like painting or replacing roofs.
- Tax benefits. Unless you are still paying on a mortgage, there isn’t likely to be a big tax benefit in owning your own home. Your deductions for mortgage interest and real estate taxes, as well as other deductions, need to exceed the amount of the standard deduction to have any benefit.
- Lost investment opportunity costs. Lost investment opportunity costs apply only if you own your home in retirement. If you have a lot of equity in your home, or you own it outright, you are sitting on a pile of cash that may not be working for you and can even depreciate if your home is not maintained properly. Say you are 65 and your home is worth $300,000 today after purchasing it 30 years ago for $60,000. If you decide to sell the home you would receive about $240,000 less selling costs of about $14,400 (at 6.0%) netting you $225,600 before taxes. That much money invested for a return of 4% would provide about $750 a month for the rest of your life without even touching the $225,000 principal. Older retirees can also use their homes for a source of income through reverse mortgages, but this form of financing can be expensive, so get counseling first.
To help you run the numbers, try these “rent or buy” online calculators and check with a professional financial advisor: