Should you rent or buy in retirement?

Grandkids, extended vacations, time for new hobbies — the prospect of retirement is nothing short of exciting, especially for those close to reaching their golden years. However, in addition to choosing whether to take up golf, many empty nesters face an important decision about whether to downsize to rent or buy in retirement.

Owning a home comes with many upsides, including fixed monthly costs, stability and an opportunity to build equity. However, there are also good reasons to rent in retirement, including less maintenance and fewer surprise costs, the freedom to move, and the ability to invest more money.

While there are benefits on both sides, it’s often a personal decision without a clear-cut answer. If you’re on the fence, consider these points before making your next move.

First, understand your cash flow needs

One of the biggest lifestyle changes for individuals entering retirement is being bound to a fixed income. Even if you’ve been diligent about putting money away in retirement savings and maxing out your Roth IRA, it’s easy to feel stretched when trying to support your normal way of life. Plus, the uncertainty of medical expenses and living costs makes it hard to know if you’re truly prepared for the future. 

At the same time, you may find that the equity you’ve built up in your home over the years has left you with a sizable but hard-to-reach fortune. This gives you a unique opportunity to downsize your residence and liquidate a portion of your assets to add a cushion to your retirement savings. 

Better still, certain tax laws allow you to walk away with up to $250,000 in profit ($500,000 if filing jointly with a spouse) without facing the capital gains tax as long as you’ve owned your home for a minimum of five years.

Whether it’s out of financial necessity or you simply want a change of scenery, if you choose to sell your current home, you can look forward to having a clean slate to reset your living situation. 

The upside of renting in retirement

1. Less maintenance and fewer surprise costs: Furnace on the fritz? Two feet of snow on the sidewalk? Shower drain clogged again? Have no fear. 

One of the biggest perks of renting a home is that maintenance (both emergency and scheduled) is typically the responsibility of the landlord or property management company. Not only does this save you headaches, but it also allows you to have a firm handle on your monthly housing expenses. As a tenant, you won’t have to worry about planning for a surprise expense when the roof starts to leak or the water heater goes out -- you’re covered.    

However, if you’ve been a hands-on homeowner your whole life, this may be a challenge. Under most lease agreements, even small projects like painting a room or installing a new lighting fixture require you to get the green light from your landlord. 

2. Freedom to move and travel: Beyond the simplicity of having a handyman on call, renting a home or apartment also is a low-risk commitment. It can be especially exciting in retirement, as it allows you to spend chunks of time away visiting family or traveling for leisure. 

If you decide you want to move across town (or across the globe), you’re able to do so with relative ease by subletting your space or resolving your lease agreement. Imagine waking up at your place in Florida one month and then Italy the next! Even if you don’t want to change cities, you can upgrade or downgrade your home over time as personal needs evolve.  

3. Ability to invest: When you rent a place, you may have more money to invest or keep in a safe place because you don’t need to worry about a down payment or closing costs. This money could help with your retirement budget or keep up with inflation with a healthy portfolio. Also, if you do have an unplanned expense, having this cash illiquid and not tied up in your home can be a lifesaver.

The downside to renting as a retiree

1. Rent increases: Your rent will most likely increase as you move further into retirement. And before you know it, you may be priced out of the neighborhood or city you’ve grown to love. In fact, it’s possible for rents to as much as double in just 10-20 years, which is particularly concerning for people just beginning retirement. Rising costs is something you’ll need to plan for as you create a retirement budget.

2. Instability: Your landlord may decide one day to sell their place and then you need to look for another place. The stress of this uncertainty may be hard to live with. You may also want to make improvements to your rental, but the landlord may not see the same value in a renovation. If these factors are important to you, you may want to consider buying a home.

3. No equity or tax benefits: Many retirees use their home as a way to leave an inheritance. If you’re in an area where property values are rising, you may feel you should buy now to get a good return for your family. (It’s important to remember that housing doesn’t always go up, so you’ll need to be pretty confident about the future.)

Another perk you may be missing if you’re renting are tax breaks. When you own a home, you could deduct mortgage interest and property taxes. Those benefits can be a big perk and leave you owing less to the IRS.

Benefits of buying a home remain strong

While renting provides flexibility and convenience, there are still inherent benefits to buying a home.

1. Fixed monthly costs: If you’re not concerned about mobility or maintenance and you’re able to secure a mortgage payment that’s comparable to monthly rent, it’s likely advantageous to purchase a home. A fixed-rate mortgage can offer stability and make financial planning a little easier.

Unlike fixed-rate mortgages, which are locked in at a consistent payment amount, rents can rise due to demand and other economic factors. Property taxes, on the other hand, generally increase at a slower rate and can be offset by improved home values. By owning a home, you may not have to worry about your housing expenses too much. Before purchasing, though, you’ll need to know how much home you can afford throughout your retirement.

2. Stability: It’s hard to put a price on stability and the feeling of ownership. Buying a home gives you the freedom to customize the space as you please. If you want to tear down a wall or remodel the kitchen, you can do so at your discretion. 

3. Build equity: Even if you downsize, buying a home early in retirement allows you to build equity in your home. Instead of spending money on rent, you could build a nice inheritance for your family or yourself if you choose to sell later in retirement.

Risks to buying in retirement

1. Valuable funds are not available: If your circumstances change abruptly and you need to sell, you may be socked with unexpected closing costs and brokerage fees. Worse yet, if the market changes and your home doesn't retain its value, you could be faced with the crippling situation of owning a home that's underwater from an equity standpoint.

2. Maintenance costs: Fixing a leaky roof or broken refrigerator will be your responsibility as a homeowner. If you are looking to buy, a recently remodeled or new home may be your best bet. However, if you have an emergency fund, sudden expenses could have less of an effect on your monthly retirement budget.

Weighing personal factors

The decision to sell a home can be emotional and financial. The same can be said when deciding to forego homeownership altogether in order to rent long-term. 

Not only has homeownership consistently been a way to build wealth in the United States, but to many, it’s a tangible reminder of the American dream. So, if you’ve always envisioned handing down your home to a son or daughter, the idea of renting may be tough to come to terms with. 

That said, the improved quality of life and flexibility that renting offers can certainly outweigh the sentimental drawbacks. Plus, rather than using proceeds from the sale of a home to buy another home in retirement, those proceeds can be invested and later willed to loved ones as means to preserve and pass on wealth.

While everyone’s situation is different, the most important thing to consider in retirement is the well-being and financial stability of you and your family. By planning ahead and understanding your options, you can be sure that your years ahead remain golden.

Katie Pins is a marketer fascinated with finance. Whether the topic is about the psychology of money, investment strategies or simply how to spend better, Katie enjoys diving in and sharing all the details with family, friends and Money Mentor readers. Money management needs to be simplified and Katie hopes she accomplishes that for our readers. The saying goes, "Knowledge is Power", and she hopes you feel empowered after reading Money Mentor.