Retirement Living: Renting vs. Home Ownership

Many retirees choose to downsize once their children are grown and have moved out on their own. Whether they rent or own during this stage hinges on a range of financial and emotional factors. From tax law changes to attitude shifts, the traditional preference for owning versus renting is changing. Households in which the renters are over 60 climbed 43 percent from 2007 to 2017, a trend that surpassed owner households and is booming more than other age groups, according to RentCafe’s analysis of Census Bureau data.

If you’re deliberating the best option for you, here's what you should consider asking yourself before deciding.

Know Your Retirement Budget

Figuring out your budget is the first step in determining whether to rent or buy. In addition to the money you saved in a 401(k), IRA, or another retirement account, you'll need to consider any extra funds going toward your next chapter.

If you decide to downsize and sell your home, you can invest those profits in the kind of lifestyle you want in retirement. If you earn enough on the sale of your home to pay cash for a smaller home and still have enough to cover the rest of your budget, then buying may be a good option.

But the home price is not the only factor in your budget. You'll also need to consider maintenance costs and taxes on owning a home. A general rule for estimating the annual cost of home repairs and upkeep is 1 to 3 percent of your home’s value. So for a home worth $375,000, you’d want to reserve about $3,750 per year or around $313 per month.

Regardless of your age, you can start building a retirement budget for what you need, whether it’s buying a home or renting. Using a retirement expenses calculator, you can estimate the cost of a comfortable retirement. It's also a good idea to meet with a financial advisor or use an online robo advisor to help you develop a plan that meets your retirement goals.

Are You Looking for Flexibility and Less Maintenance?

Historically, a strong reason to buy rather than rent was that it was a good investment in funding your retirement. Once you’re retired, the future value of your home is usually no longer an important part of the equation.

Tax considerations were also once a major reason to own your home; however, changes in allowable tax deductions now make this a far less valuable factor.

When you rent, you don’t have to worry about the responsibilities and added expenses of home repairs, maintenance, taxes and insurance. On the other hand, rents increase over time. The average national rent increase is about 4 percent, but rates vary according to location and size, and renters typically sign a yearly lease that locks in the monthly rent payment.

Renting in retirement also gives you the chance to experience a new destination or smaller living space and determine if you want to spend the rest of your retirement there. If you decide to stay, renting can help you get a better feel for what part of that new town suits you best. With a landlord to take care of maintenance, you have that much more time to devote to the things most retirees want—time for travel, hobbies and enjoying friends and family.

With renting, you don't have to worry about timing the market to avoid selling your home when its value has dropped. It’s also much faster, easier and cheaper to move when you're renting instead of buying or selling a home.

Do You Want More Stability and Control?

Home ownership is arguably as much a state of mind as it is an investment. As a homeowner, you have a mindset aimed at maintaining or increasing your home’s value. You are in charge of any home updates and changes, which is limited when you're renting.

Home maintenance can be a burden, though, especially as you age. One way to own your home without maintenance responsibilities is to buy a condo. This allows you to pay a monthly homeowners association fee, which covers maintenance, landscaping, and upkeep for common areas such as a pool or gym. Condos are also typically in excellent condition because they’re individually owned.

Another factor in whether to rent or buy in retirement is how long you plan to be in your new condo or house. You should expect to be there at least five years to make it worth the costs involved in buying and selling the home.

Decide Where You Want to Live

This is another determining factor in whether to rent or buy. Data shows that renting is more affordable than buying in most populated suburban and urban areas of the U.S., but owning a home is more affordable in less populated counties.

While population is key, certain markets have a preference for renting versus buying. For example, renting is more affordable in most counties with more than 1 million people, such as Los Angeles, Chicago, New York, Phoenix and San Diego. However, in some counties with a population of at least 1 million—like Miami, Detroit, Philadelphia and Cleveland—buying is more affordable than renting.

This analysis of fair market rent data from ATTOM Data Solutions revealed that owning a median-priced, three-bedroom home is more affordable than renting a three-bedroom house in more than half of the U.S. counties in the report. It also notes that home prices are rising faster than rents in 67 percent of markets.

Whether you rent or own in retirement depends on your answers to these four questions. Personal preferences and carrying out your vision for a comfortable retirement hold as much weight as your financial picture. Being thorough now will help minimize the stress and expense of making sure your next chapter is the dream retirement you worked so hard for.