Should you Rent In Retirement?

July 10, 2015

Now that you are entering retirement, it might be time to consider whether your current residence is where you want to spend the rest of your life. The extra bedrooms or the big yard could be too much to keep up with or unneeded. With the opportunity to downsize comes the question often encountered by everyone at this moment: should I buy or should I rent and does it make a difference in retirement?

 

Considering renting can be a tough choice, especially for long-time homeowners, but don’t be too quick to dismiss the idea. Renting can be the right decision depending on the situation, especially in retirement. Pulling funds from your retirement accounts to use as a down payment can be really expensive tax-wise. Instead of sinking funds into a new home, it might be better to invest the assets and use the growth to help fund your retirement.

 

One of the most important factors in any financial decision, especially homeownership, is the time frame you are considering. There are typically significant costs with buying and selling a home, between paying the real estate agent and closing fees, it can be financially devastating to buy and sell homes in quick succession. If you think you will only stay in a home for a few years or less, it is better to rent. For a more precise break-even analysis, you can use an online calculator like the one below:

 

Schwab Rent vs. Buy Calculator

 

We also recommend that even if you intend to stay somewhere long term, but it is a place you are unfamiliar with, you should rent for the first year to make sure that it is the right fit and to give you a better feel for the area.

 

It is okay to consider the emotional side of home ownership as well. Some retirees love fixing up their property and enjoy spending time taking care of the landscaping. However, others prefer spending their time on other hobbies and having a landlord to take care of any issues reduces stress for them.

 

For those who do decide to downsize, but still want to own their next home, it can be worth considering getting a mortgage. Depending on the tax bracket, the interest deduction might be one of the few ways a retiree can reduce their tax bill. However, before taking out more debt, it is important to make sure you have appropriately budgeted out the debt repayments and are not using the debt to fuel more discretionary spending.

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