Deciding whether to rent or buy a home was never an easy question for my parents. Now age 83 and 84, they always treated homeownership as sacrosanct. Not only was owning their home a symbol of success, but it provided a haven that offered security and comfort.
But when my parents recently left the home they owned in New Jersey for 43 years to move near my sister in California, they opted to rent. And after decades of do-it-and-pay-for-it-yourself, they are finding—surprise!—that it’s nice to have someone else handle the landscaping and call in the plumber.
My husband and I might do the same in retirement. And as I’m learning, though some factors in the decision to rent or buy are the same at any age, others take on more significance in retirement.
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A first consideration is how long you expect to live in your new residence. Just because you’re retired doesn’t mean you’ll stay in your new digs. Down the road, you might want something smaller or more accommodating to a disability.
But the shorter the stay, the less financially attractive owning a home in retirement becomes. For one, you’ll have to spread points and other closing costs over less time. If you finance, you’re likely to have little new equity to show because you’ll pay so much in interest in a mortgage’s first years.
For that reason, if you are retired, you should rent your home if you don’t expect to stay more than three or four years, says Josh Fatoullah, founder and CEO of JR Wealth Advisors in Great Neck, N.Y. “The last thing we would want is where you’ve paid the closing costs and then you’re just not happy,” he says.
Assuming you can determine the minimum time you’ll stay in a new home, you can then compare the costs of homeownership and renting. Early retiree Darrow Kirkpatrick provides an analysis in his insightful blog Can I Retire Yet?. He took a hypothetical $300,000 home in his Tennessee town and added up its expected maintenance and repair costs, property taxes, and homeowners insurance, then figured in the opportunity cost—what his money could earn in stocks and bonds if it wasn’t tied up in home equity.
Kirkpatrick’s estimated, effective cost of homeownership over a 10-year period was $834 per month for every $100,000 of a home’s value. In other words, a $300,000 home would generate $834 x 3, or about $2,500 per month in ownership costs. If a retiree could find a comparable property to rent for less than $2,500 per month, he should rent.
Online mortgage calculators can personalize calculations like that for you. The New York Times’ sophisticated rent-vs.-buy tool is among the better ones I’ve seen.
The Times’ tool and Kirkpatrick’s calculations also consider the impact of buying a home outright vs. getting a mortgage. If you can stomach holding on to debt late in life, you might benefit from getting a mortgage and investing in stocks, bonds, and other holdings rather than paying for your home outright. The National Association of Realtors says that since 1968 (when it began tracking real-estate inflation) through 2013, single-family home prices have increased 5.3 percent annually on average. In that same period, 10-year Treasury bonds returned an average 7.4 percent annually (neither figure accounts for inflation).
Of course, future stock, bond, and real-estate markets won’t necessarily act as they have historically. Point is, the opportunity cost could be greater if you tie up money in a home rather than taking out a mortgage.
I can’t speak of mortgages without mentioning the federal tax deduction on mortgage interest. It’s often held up to justify owning. But it may be worth less if your retirement income puts you in a lower tax bracket than when you were working. (Income from required minimum distributions also can raise you to a higher tax bracket.)
Other, non-monetary factors may dominate your decision. If your pug requires a backyard lair or you’ll feel lost without a home-improvement project, you’ll want to buy—or find an owner who is OK with Roxy’s ranging or welcomes your tinkering.
As for my mother, she’s gardening at her rental home, just as she did in her New Jersey yard. This spring she expects to greet blooms of chocolate cosmos, hyacinths, tulips, bluebells, and daffodils. As a tribute to her new locale, she’s adding California poppies.
They add a homey touch.
This article also appeared in the January 2015 issue of Consumer Reports Money Adviser.
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