Should Downsizing Retirees Rent or Own Their New Home?
Downsizing your home is a popular retirement strategy as it lets retirees simultaneously cut back on maintenance costs while potentially freeing up a chunk of cash that can be put toward other expenses.
But while most downsizing seniors expect to remain homeowners, albeit of somewhat smaller domiciles, for many renting may actually make more sense than buying something new.
In fact, says Phil Cannella, a retirement planning expert based out of King of Prussia, PA, for the majority of people, renting can be “the better option.”
That might come as a surprise, particularly given the broad popularity of homeownership in the U.S., where even with the post-2008 slump almost two-thirds of people own their homes. Nonetheless, renting has a number of benefits for retirees.
One major consideration is cost. “Owning a home comes with high property taxes, costly homeowners insurance, as well as unpredictable maintenance costs,” he says. “If [for instance] your furnace breaks, you are responsible for replacing it.”
While renters may be responsible for utility payments, they are not generally responsible for property taxes or property maintenance costs, and renters insurance is typically much less expensive than a homeowner policy. And, Cannella notes, “depending on where you live, monthly rental payments can be considerably lower than a mortgage payment.”
Keeping expenses low is good financial policy for any household, but it can be particularly important for retirees, many of whom are on a fixed income. Lowering housing costs means there are more funds available for other expenses such as groceries, recreation, medical bills, and so on.
Also a factor, Cannella notes, is the greater flexibility renting provides. Suppose retirees decide to try a popular retirement spot like Florida only to discover they can’t stand the heat. If they’ve bought, moving will mean losing money sunk into costs like closing fees and taxes. This can also be a consideration for retirees who are forced by failing health to move in with family or to an assisted living facility, Cannella says.
And while homes are often perceived as good investments, there may be other vehicles that can provide equivalent or better returns. According to Adam DeSanctis, a spokesperson for the National Association of Realtors®, home prices have appreciated at 5.4 percent a year since 1968—a solid but not spectacular rate of return.
That said, there are still advantages to homeownership that retirees should consider, Cannella says. This is particularly true with regard to tax planning, as well as mortgage interest, property taxes, and mortgage insurance, all of which may be tax-deductible.
And, he notes, the decision will also turn somewhat on the specific housing market a retiree is considering. “There are certainly areas of the country where home prices and rents are inflated, which retirees living on a fixed income should avoid,” Cannella says. In certain areas, rents exceed mortgage costs, although this typically occurs in depressed housing markets—Detroit, for instance.
Despite the many potential advantages of renting, Cannella says most of the clients he comes across in his practice “expect to remain homeowners.”
“They grew up pursuing the American Dream, which included owning and paying for your own home,” he says, adding that for those 65 and older, the homeownership rate exceeds 80 percent.
“It all depends on the person’s financial situation and feelings toward owning or renting,” he says. “There are no easy answers.”