By the time many of us retire we’ve become so accustomed to owning a home, that the idea of renting one might never occur to us.
But if you’re pondering a change of address in retirement, it’s worth considering all the angles of buying vs. renting, even if you haven’t been a renter since shag carpets were in style.
Home Prices Are Soaring
If you need to make this housing decision soon, you’ll want to take into account the recent run-up in home prices in many parts of the country since that could affect whether you can afford to buy.
20 U.S. cities showed prices up 10.9% over the past year, the biggest gain since April 2006.
When you’re figuring out whether to buy or rent an apartment in Raleigh, NC in retirement, a lot depends on your personal financial situation, of course. You’ll be factoring in such things as how much you’d get for selling your current home, your total savings and when and where you’ll retire.
An Argument for Buying
That said, if you’re raring to relocate now, today’s near-record low mortgage rates make this an unusually opportune time to buy.
If your retirement is years away, however, the picture could change. Higher mortgage rates, fast-rising housing prices or a combination of the two might make renting look like a bargain.
The Mortgage Issues
Of course, mortgages typically require a down payment, which can involve coming up with a serious chunk of cash up front.
If you’ve sold another home at a profit, the down payment might not be a problem for you. But if you’ll have to tap your IRAs or other retirement accounts, that move could seriously cut into the amount of money you’ll have left for daily living expenses.
Withdrawing money from a retirement plan for the down payment also means you’ll lose the valuable future tax deferral on it and might owe taxes (maybe even a tax penalty) when you take out the cash.
Then there’s the question of whether you even want to carry a mortgage in retirement. You can argue that one both ways from a financial perspective.
But the mortgage decision is about more than finances. Many retirees report a psychological boost from not having a big debt hanging over them at this stage of life. And that’s worth something, too.
The Tax Angle
As you most likely know, if you buy a home, your property taxes will generally be tax-deductible, as will your mortgage interest payments if you finance the purchase.
If you rent, you won't have these tax deductions, although you may be able to write off a portion of the rental as a home office if you run, say, a consulting business from there.
Keep in mind, though, that tax deductions won’t be as valuable to you if your income and tax rate drop after you retire, which is pretty likely.
So if you could save more than the amount of your tax savings by renting, then that might be the way to go, purely from a tax perspective.
The Investment Angle
You’ll also want to factor investing into your rent vs. buy equation.
Let’s say you sell your home of many years and walk away with a big profit as you enter retirement. You’ll basically have two choices: buy another place, possibly a less expensive one that will let you invest some of that equity or rent a home and invest all the money you made.
If you’re a capable investor, you might come out ahead by renting and investing your home-sale profits.
A portfolio made up of 50% stocks and 50% bonds delivered an average annual return of 8.3% from 1926 to 2012, according to Vanguard. That may be an overly optimistic number in today’s investment world, but it’s worth noting that the Yale economist Robert Shiller has found that housing has historically delivered an almost negligible return, once inflation is taken into account.
More Angles to Consider
Some of the most important questions you’ll want to ask yourself about buying vs. renting have little or nothing to do with money. For example:
If you buy a home, how long will you stay? The Trulia study based its calculations on owning for seven years. But the site noted that you’ll see less of an advantage from buying if you don’t stay that long, due in part to the upfront costs of purchasing a home, like closing fees.
Retirees generally shouldn’t buy homes unless they intend to live in them for at least five to 10 years.
If you’ll be moving to a new area, it is recommended that you rent for at least a year to rule out any unhappy surprises. “Some people find it hard to assimilate into the new community.” “They miss their family back home or just don’t connect.”
Do you mind being tied down? Some retirees want the freedom to experience new places from time to time. That’s a good argument for renting, even if the cost is more expensive, since you’ll have an easier time pulling up stakes.
Other retirees, by contrast, like the feeling of rootedness that comes with being a homeowner.
This Housing Decision May Not Be Your Last
One final word on the subject: Keep in mind that where you move next may not be where you’ll stay throughout retirement. Given how long retirement can last these days, you could find yourself changing addresses several times and switching between renting and buying along the way.
For more information on renting in Raleigh, NC during retirement, contact Auston Grove Apartment Homes.