A common question that emerges when approaching retirement is, “Where do I want to live?” The next question is usually, “Should I rent or buy?”

For those age 65-plus, the rate of homeownership has held steady in the ~80% range. Some analysts think this rate will drop over the coming decades as home costs increase, making renting a far more attractive alternative.

Several factors should be taken into consideration when making this type of financial decision. It is important to remember that while cost is a big factor, it is one of many that you should assess when trying to decide between renting and owning a home in retirement.

Renting

Renting has several distinct advantages:

Flexibility: While you may feel you found your “forever” home, desires tend to change over time, and what you want today may not be what you want tomorrow. People’s ideas about where they want to live often depend on factors ranging from climate and being close to friends and family, to entertainment options and age demographics. Buying and selling homes during retirement is not for everyone, as the process can take several months or much longer in a bad economy. Renting provides the flexibility to change your living situation without significant cost or time.
Accessibility: At some point in retirement, climbing stairs, clearing snow, and maintaining a lawn will likely become a nuisance and something you may want to avoid. While moving to an assisted-living facility or a retirement living community is not likely until much later in retirement, it is a decision you probably will face. By renting, the option of moving comes with relative ease to match your desires at each phase of retirement.
Lower expenses: Homeownership comes with many one-time expenses and ongoing maintenance costs. These range from mortgage payments and property taxes to utilities and homeowners association dues. Perhaps the biggest wild cards are the “one-time” maintenance expenses. The costs to replace appliances, repair plumbing, or fix electrical issues can quickly add up—and occur more often than we think. With renting, the landlord is responsible for replacing these items, which frees up cash flow that you can use to boost retirement spending.
Financial: By selling your home and renting, you unlock a large amount of capital. This can be allocated to help pay for rent while investing a portion to earn a higher potential rate of return and keep up with cost-of-living adjustments. Working with a wealth manager can help identify the appropriate investment mix based on your risk tolerance and investment time frame.

Ownership

As with renting, homeownership also has its advantages:

Tax benefits: Homeownership comes with several tax perks, mainly the ability to deduct mortgage interest and property taxes for those who itemize deductions. It should be noted that ~90% of taxpayers use the standard deduction, so this perk ends up benefiting only a small percentage of American households. In addition, the standard deduction is increased for those age 65 or older, so for most retirees, this rule won’t apply. Another perk involves the ability to exclude up to $250,000 ($500,000 for joint filers) of profits from a home sale from taxable income if certain conditions are met. Renters are not eligible to take advantage of these benefits.

Personalization: By owning a home, you can design and furnish the place to match your taste. This is important as the look and feel of your home can make all the difference in your decision, especially when it involves home renovations or upgrades. With renting, some alterations or changes typically require approval from the landlord.
Stability: Owning your retirement home provides stability and eliminates dealing with a landlord, who could significantly increase rent or choose not to renew your lease. Ownership also helps you avoid having to find a new place to live, which can be both emotionally and physically draining. If you rent, you should be mentally prepared to move multiple times throughout retirement.
Equity: While renting is generally a way to save money, ownership builds home equity and can lead to potential capital appreciation. While most retirees do not purchase a retirement home for potential long-term appreciation, it is something to consider, as home appreciation can benefit you or your heirs down the line. Also, you can always rent your home if you desire a temporary change of scenery.

It is recommended that you figure out the retirement lifestyle you can afford before deciding on renting vs. owning. You can do this with the assistance of a financial planner who will build a retirement budget that includes your income (e.g., Social Security) and expenses to help determine which route is best suited for you and your needs.

For most retirees, purchasing a home in retirement is generally viewed as having a place to call “home” and not as an investment.

While it is likely you will move at some point during retirement, you’ll need to decide whether having control over when you move is more important than having the flexibility to move every few years. This decision will likely be a difficult and emotional process, and because of that, it is recommended you take your time to weigh the pros and cons of deciding.

Discuss your situation with a fee-only financial advisor.

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