> Taking the Next Step
We tend to envision retirement as a time to live in a house with a paid-off mortgage. But for many retirees, renting could be a better option.
Take the case of Timothy Wiedman. When he retired, Wiedman sold his house, which was way too big for his current needs. Mortgage payments, property taxes, and ever-rising homeowners insurance rates became things of the past. Wiedman, a former professor in Crete, Nebraska, could instead focus on making his retirement comfortable.
“I looked for the right ground-floor apartment, and the search took a while — nice ground-floor units don't turn over very fast,” Wiedman said. But he found one, and the front door gives him direct access to the communal lawn and parking area. “Bringing in groceries or packing the car for trips is a breeze!”
Like Wiedman, renting could be a better option for many retirees. Someone else takes care of the maintenance and its large, sometimes unpredictable expenses that may be difficult to manage on a fixed income. Selling your home frees up equity that you can live off of: Wiedman says he banked a major chunk of cash after closing the sale and invested it in a conservative mutual fund that has grown year after year.
Sure, you have a monthly rent bill. And the landlord can raise the rent, which could be a worry for someone on a fixed retirement income. Still, in some cases, renting may sense for certain retirees.
Fewer Estate Headaches
Owning real estate complicates estate planning, said real estate investor Brian Davis, cofounder of SparkRental.com, a site that helps landlords automate rental property management. Children often fight over what happens to their parents’ home after death: one might want to sell and another might want to move in. And selling the home is time-consuming, stressful, and often emotional for the heirs. (Related: Keeping Heirs from Fighting)
“Retirees should consider offering to sell their home to any of their children, and if none bite, then selling it themselves,” Davis said in an interview. Once the home is sold, the retirees can move into whatever housing they see fit, and as renters, they can move again whenever that choice no longer suits them.
Leasha West, president of West Insurance and Financial Group in Grand Rapids, Michigan, said in an interview that moving into a rental property gives retirees an incentive to downsize, handle clutter, and give away their possessions as they see fit while they are still alive. By doing so, they reduce the family burden of disposing of their loved one’s belongings after death.
Indeed, Wiedman said he donated his unneeded possessions to friends, family, neighbors, and worthy charities.
“Since my next-door neighbor often borrowed my heavy-duty, wooden 8-foot step ladder, he was overjoyed when I offered it to him — for free!,” Wiedman said in an interview. “The folks at Goodwill also appreciated getting my 8-year-old full-sized sofa that looked practically new. Finally, another neighbor, who always seemed to have trouble starting his lawnmower, was thrilled when I offered him my 5-year-old mower that had always been extremely reliable.”
Davis said flexibility is a key advantage for anyone who rents. For older adults, flexibility means having the option to move to be near children; the option to spend different parts of the year in different places; and the option to move into gradually easier housing as they age.
Indeed Wiedman says he rarely misses the time-consuming and often costly chores associated with maintaining a home, such as lawn care, tending the flower beds, regularly resealing the deck, completing exterior painting projects, removing snow, cleaning gutters, raking leaves, trimming trees, and keeping the water heater, furnace, air conditioning, plumbing, and major household appliances in good operating order.
Beyond chores, when preferences or needs change, moving out of a rental can be much faster than moving out of a house and does not have the same transaction costs. Landlords cannot stop you from moving at the drop of a hat (though there may be a fee for breaking the lease). Selling a house can take months or years, depending on your home’s condition and your local housing market, and can cost as much as 6 percent of the sales price in real estate agent commissions plus anything you spend to fix up the home and make it more appealing to buyers.
Buying another home to replace it can also be a slow process since you not only have to find a place but also negotiate with the sellers, get a home inspection, and, if you are not paying all cash, close on a mortgage, which typically took 46 days as of August 2016, according to mortgage data provider Ellie Mae.1 Plus, mortgage closing costs usually total 2 percent to 7 percent of the purchase price, or $5,000 to $17,500 on a $250,000 home, according to recent statistics on Realtor.com.
As we get older and nearer retirement, physical challenges can make a once-comfortable house difficult to navigate. According to a survey by the US Census Bureau, nearly 40 percent of people age 65 and older have at least one disability, most commonly trouble walking or climbing.2
Climbing stairs or clearing a snowy path can become more difficult, and the risk of slipping and falling becomes more serious. Indeed, falls are the leading cause of injuries and injury-related deaths among adults age 65 and older, according to the Centers for Disease Control and Prevention,3 and one in five falls causes a serious injury such as a fractured hip or traumatic brain injury.
It may be tricky to get in and out of the bathtub or shower or to sit down on and stand up from the toilet. The entrance to your home and your interior hallways and doorways might not accommodate a wheelchair or a walker. Doorknobs and faucets can be difficult to use if you have arthritis in your hands or wrists. The Joint Center for Housing Studies of Harvard University found that while 76 percent of homes are single-story, only 42 percent have no-step entryways, and only 8 percent have extra-wide hallways and doorways or lever-style doorknobs and faucets.4
In some cases, it might be easy enough to modify your home with lever-style knobs and faucets, a stair lift that takes you to the second story, a few grab bars in the bathroom, or a wheelchair ramp to the front door. In other cases — for example, if your home does not have a first-story bedroom and bathroom — a rental unit that is designed with seniors’ accessibility needs in mind might be an easier, less expensive, and more comfortable solution than a major remodeling project.
Comparing the Costs of Renting versus Owning
A 2016 survey by real estate company Trulia found that for retirees who are not concerned about leaving a home for their heirs to inherit, it makes more financial sense to rent than to buy in 98 of the 100 US cities with the largest populations of people 65 and older.
Thomas W. Watts IV, a financial planner with Watts Capital Partners in New York, explained in an interview how to compare the costs of renting versus owning. Say you could own a home worth $500,000, or if you rented, you could have that $500,000 to invest. Assume a 5 percent annual return, or $25,000, then divide that amount by 12 to get a monthly return of $2,083. If you can rent a comparable home for that price, you would be equally well off financially whether you rented or owned. (The actual calculations he performs for clients are slightly more complex to account for the effect of taxes, but this is the primary approach.)
The benefit of renting is that you do not have maintenance costs, taxes, or renovation expenses. The risks are that your investment income might not go up with inflation and your rent might increase faster than your retirement income. Weidman said he has encouraged retiring clients who are house-rich and cash-poor to look at renting as an alternative to using a reverse mortgage to get the cash out of their house. Renting can often reduce expenses and simplify a retirement lifestyle significantly, and investing the money from selling the home can augment a cash flow that would otherwise be too low to meet their expenses.
Do Retirees Want to Rent?
In 2016, The American College of Financial Services, a nonprofit educational group, surveyed more than 1,000 people between ages of 55 and 75, with at least $100,000 in investable assets and $100,000 in home equity to determine where homeowners wanted to live in retirement.5 Eighty-three percent of respondents said they wanted to remain in their current home for as long as possible. For respondents that expected to move at some point, only 5 percent said they planned to rent, while 31 percent were undecided and 64 percent planned to buy. More than half of respondents said they had not considered how they would use their home equity during retirement. While 45 percent of respondents said they were not concerned about leaving their home as a legacy to their heirs, only a quarter said they felt comfortable spending their home equity in retirement.
“What we saw was that renting appeared to come from necessity more than anything else,” said Jamie Hopkins, retirement income program codirector at the American College, in an interview. “Very few homeowners ever showed a desire to rent, but if they did, it was related to their overall wealth, as lower-wealth individuals were more likely to consider renting in retirement.”
Hopkins said he thinks so few current homeowners are interested in renting during retirement because people take pride in owning their homes and see it as a sign of success. The idea of renting may seem like a step backwards. And most people want to age in place, not move.
Still, for retirees who can see how the practical aspects of renting might outweigh the emotional aspects of remaining a homeowner, renting offers the opportunity for increased cash flow, greater flexibility, more accessible accommodations, and a simpler lifestyle.
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1 Ellie Mae, August 2016 Origination Insight Report.
2 Wan He and Luke J. Larsen, “Older Americans with a Disability: 2008−2012, American Community Survey Reports,” December 2014.
3 Joint Center for Housing Studies at Harvard University, “Housing America’s Older Adults: Meeting the Needs of an Aging Population,” 2014, p. 22.
4 Joint Center for Housing Studies at Harvard University, “Housing America’s Older Adults: Meeting the Needs of an Aging Population,” 2014.
5 The American College, “Home Equity and Retirement Income Planning Survey.”