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Is it better to rent or buy a home in retirement?

downsizing for retirement
October 06, 2016

By Thomas Muellner

Grandkids, extended vacations, time for new hobbies — the prospect of retirement is nothing short of exciting for individuals who are on the cusp of reaching their golden years. However, in addition to choosing whether to take up golf, play a new instrument or make pottery, many empty nesters face an important decision about whether to rent or buy a home when downsizing in retirement.

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

Understanding cashflow 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, it’s easy to feel stretched when trying to support your normal way of life. Moreover, 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 presents a unique opportunity to downsize your residence and liquidate a portion of your assets to add a cushion to your retirement savings. 

Better still, favorable 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 go this route, you can look forward to having a clean slate to reset your living situation. 

Weighing personal factors

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

Not only has homeownership consistently been a vehicle 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. Furthermore, proceeds from the sale of a home can be invested and later willed to loved ones as means to preserve and pass on wealth.

The upside of renting

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, it allows you to have a firm handle on your monthly housing expenses. As a tenant, you won’t have to worry about 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. 

Beyond the simplicity of having a handyman on call, renting a home or apartment also is a low-risk commitment. It can be a particularly enticing prospect 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. Even if you don’t want to change cities, you can  upgrade or downgrade your home over time as personal needs evolve.  

Benefits of buying remain strong

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

Unlike fixed-rate mortgages, which are locked in at a consistent payment amount, rents can rise due to demand and other economic factors. 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 individuals just beginning retirement. Property taxes, on the other hand, generally increase at a slower rate and can be offset by improved home values.

What's more, 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. 

However, buying a home is not without risk. 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 under water from an equity standpoint.

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 the years ahead remain golden.