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Should You Rent or Own Your Home in Retirement?

Moving after retirement is a very popular goal for many retirees. Often people want to downsize, try living somewhere new, or move closer to kids and family. Others are often looking for a second home or a vacation getaway. With that choice comes a pivotal decision: should I rent or buy my next home?

Some people might wonder why we’re even asking the question. After all, renting is just throwing your money away every month, right? At least, that is something many of us heard when we rented our first apartments. There is a great deal to consider, and renting may actually be the best financial decision you can make.

Reasons to Rent?

As people enter retirement, there are multiple factors to consider. Purchasing a home could tie up your assets for the foreseeable future, while renting allows you to keep your assets liquid, making it easier to pay for unexpected necessities, travel, etc. While it is possible to access home equity, that may involve jumping through a number of hoops to do so. Additionally, the Tax Cuts and Jobs Act of 2017 significantly decreased the tax benefits of purchasing a home, meaning it no longer offers all the tax savings it once did. Moreover, investing the money that might otherwise be used to purchase a new home may turn out to be more lucrative. Home values typically appreciate 3.5% to 3.8% per year, while the average annual return for the S&P 500 is roughly 8%. Of course, past performance is no guarantee of future outcomes. Also, people approaching or living in retirement may want to invest more conservatively than someone in the middle of their career. Nonetheless, it would be very feasible to exceed the return you’d receive buying a new home by investing in stocks instead and simply paying rent.

How long you plan to stay in a location can also be a determining factor. If you plan to stay for ten years or more at a new location, purchasing probably makes sense. However, if you plan on staying for less time, especially less than five years, it’s unlikely that you’ll be able to make up the moving costs, broker fees, mortgage closing costs, and other expenses associated with purchasing. Also, where you choose to move can play a significant part in your decision. In general, renting is cheaper than buying in areas where real estate is especially expensive, such as on the coasts. The opposite is generally true in the middle of the country. Renting can be a good option if you plan to travel a great deal. This way, you don’t need to constantly monitor your house from afar and deal with any problems that may arise.

If you’re moving to a new area for retirement, it’s often a great idea to rent, at least initially. This way you have more time to get a sense of your new hometown, and you’re not stuck with anything that you’re not happy with a few months or years after moving.

Benefits of Buying

Of course, there are many benefits to owning your home, the most obvious of which is that you don’t have a landlord. There’s no chance your home will be unexpectedly sold, forcing you to move, and if you want to change something in your house, no one can tell you not to. Additionally, fixed mortgages are a flat cost, while rents tend to increase annually. But budgeting for maintenance and repairs is a cost borne by owners that renters don’t have to worry about. Additionally, it can be a family asset, since having a home to bequeath to your heirs avails itself to estate planning opportunities. And although some of the bigger tax incentives are no longer around for home purchasing, remaining incentives such as the mortgage interest tax deduction and potential property tax deductions may be leveraged depending on your individual situation. And of course, building equity can be a great long-term advantage.

What's Most Important to You?

The right answer to renting or buying depends on your particular circumstances. You’ll need to do the calculations on which scenario makes the most sense for you and your family, based on expected future costs, benefits, personal risk tolerance, etc. Along with that, it’s important to explore the intangibles associated with the decision. Would it take a load off of your mind knowing that it’s not your problem when there’s a leaky sink or the driveway needs to be shoveled? Alternatively, do you value having full autonomy and control over your residence? In many ways, these nonfinancial aspects of the decision can have the greatest impact on our day-to-day experience in our home lives; as such, it’s important to balance them with the dollars-and-cents calculation to determine what creates the best situation for you and your family.


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