Last updated on January 10, 2020
Is it possible that most Americans are getting a major part of their retirement wrong?
According to Census Bureau data, nearly 80 percent of those age 65 or older owned a home in 2017. But it may not be the right living arrangement for everyone. Not only could renting be a better option for some retirees, it could allow younger workers the opportunity to save additional money for their retirement.
“From a psychological standpoint, homeownership is very rewarding, especially if the mortgage is paid off,” says Ed Kohlhepp, CEO of Kohlhepp Investment Advisors in Doylestown, Pennsylvania, “[but] you have so much more flexibility with renting than with owning.”
Like most financial matters, there is plenty of gray to be found in the decision regarding whether to rent or own a home. Depending on your individual circumstances, homeownership can either help or hinder your retirement plans.
The Case for Owning a Home
Many finance experts come down clearly on the side of homeownership. “In my opinion, owning vs. renting is better,” says Dan Yu, managing principal of EisnerAmper Wealth Advisors in New York City. “I view renting as you’re handing your money away.”
Homeowners possess an asset that, in most years, can be expected to increase in value. A property can be refinanced or tapped for a reverse mortgage should a retiree find savings are running dry. “In a worst-case scenario, you can sell the home and then rent,” says Ken Moraif, certified financial planner and host of the radio show Money Matters. “It gives you a fall-back plan.”
An even more important benefit of owning a home is that it provides a low cost of living. “Even homeowners who take a mortgage into retirement have a fixed monthly expense with the mortgage payment, assuming they obtained a fixed-rate mortgage,” says Kyle Quinn, managing partner with Mariner Wealth Advisors in San Diego. “Renters, however, face rent increases throughout the time they rent.”
Why Renting Might Be Better
It might be tempting to think that those who own a house are living there for free once the mortgage is paid off, but there are plenty of other expenses attached to homeownership. “Maintenance costs related to the lawn and other outdoor spaces will be ongoing,” Quinn says, “and property taxes are an expense that will never go away.”
As seniors get older, it may be more difficult to maintain a home, which could require additional help. Quinn says another concern is that homeowners, particularly widows and widowers, risk becoming isolated and lonely in a home. For these retirees, living in a senior housing community might provide benefits that go beyond financial and help boost their mental health as well.
For active seniors, homeownership poses another problem. “If they want to travel, [the house] becomes an anchor,” Kohlhepp says. The property needs to be maintained and bills must be paid, which can be costly and inconvenient for a senior who is only living there part time.
Considerations for Workers
How homeownership relates to retirement isn’t only an issue for seniors. Younger workers need to consider whether buying a property makes sense for their long-term goals or if they would be better off renting and putting the difference into a retirement fund.
“Buying a house is almost a forced savings plan,” Moraif says. A home purchased at age 35 could be a valuable asset, owned free and clear by age 65. If people think they will skip homeownership specifically to save money, Moraif says self-discipline is important. “If you’re renting, make sure you’re saving the difference,” he says.
Buying and selling a home can be an expensive proposition once closing costs, commissions and moving expenses are factored in. Despite being a proponent of homeownership in retirement, Yu says it might not make sense for young people who aren’t sure where they will settle permanently. “Maybe you don’t need to pay $30,000 to $40,000 in real estate taxes,” Yu says. “I’d rather you [put] your money into a 401(k) for six years.”