Own or Rent in Your Retirement Years?
This article is part of our ongoing series on renting in your retirement years and how it can potentially be a better option to owning your home. The series includes the following articles:
- Article 1: Why Renting in Your Retirement Years Makes Sense
- Article 2: 8 Things to Consider When Downsizing
- Article 3: Own or Rent in Your Retirement Years?
- Article 4: You Can’t Take it (all) With You
- Article 5: Life After 55 - How to Stay Active
Own or Rent in Your Retirement Years?
Congratulations, you’ve sold your home! Or, you’re considering it. Either way, decades of building equity are about to pay off. Careers are winding down, the kids are grown and making their own way in the world. It’s time to sit back, relax, and enjoy the next stage of your life; retirement.
Traditional wisdom would have you take that money and reinvest it in a new, probably smaller home to reflect your changing lifestyle. Which is a perfectly sound way to do things. It’s what our parents did, and their parents did before that, most likely.
But what if there’s… more? What if you chose a less traditional route; one that allowed you to maintain a vibrant, active lifestyle without tying up those funds in another home?
For many, reinvesting in another home is the pinnacle of retirement - owning a property and living mortgage free. And that’s a powerful, appealing motivator, as it should be.
However, in practice, it’s more expensive than people think. Everything you had to contend with in the house you just sold still applies - property taxes, insurance, utilities, etc. As the home ages in your retirement years you’ll need to do regular maintenance and upkeep. Replacing windows or a roof could put strain on your retirement budget. While not a cost if you choose to do it yourself, there is also lawn cutting, gardening and snow shovelling to consider.
Owning a condominium puts you in a similar situation - with monthly condo fees and utilities, plus the possibility of costly capital calls. If the condo board chooses to raise your fees, this can also create hardship and put strain on your finances when you can perhaps least afford it.
And while you can count on the appreciation of your property over time, a downturn in the market when it comes time to sell again may not grant you the return you were hoping for.
Renting an apartment, on the other hand, has several advantages. To begin with, maintenance is no longer your concern. Not having to worry about replacing the roof or the windows or appliances is a big relief, both financially and emotionally. Insurance is generally cheaper as well, since you are only insuring your belongings and not the apartment itself. And with the right lease, you may not have to pay for utilities, either.
Second, rent is a known cost. Not just for the duration of your lease, but year to year - it’s predictable. This is key. Predictability allows you to budget not just monthly or annually, but for years at a time. For example, in Canada's most populous province of Ontario, rent can only go up by a couple of percent per year and is controlled by the government. This means you’ll never be caught off guard by a sudden increase.
Related Post: Why Renting in Your Retirement Years Makes Sense
Then there are the intangibles - things that might not translate directly to dollars and cents, but still affect the real bottom line; your happiness.
Choosing an apartment gives you the flexibility and security to take off at a moment’s notice without care. Whether you are heading south for the winter, traveling abroad or simply visiting family and friends; your only responsibility is to turn off the lights and lock the door. And if something were to happen in your apartment while you are away, there is someone on hand to deal with it. No unexpected surprises when you return.
Renting also affords you access to many amenities on-site. Gyms and swimming pools are fairly common and will save you from 3rd party fees, not to mention the convenience factor.
And if your situation changes, for any reason, it’s that much simpler to move somewhere else.
So if you’re not purchasing a home with your money, what then? What are your options, short of stuffing it under the mattress or keeping it in the bank?
Well, there are many opportunities for investment available that will make your money work for you. And choosing one with even a modest return of 5% will likely allow you to cover your rent and a good chunk of your monthly expenses.
For the purposes of this article, assume you sell your family home, and clear $750,000 after paying realtor fees and closing costs. Choosing one of many low risk income funds to invest in (using the above 5% return) will earn you $37,500 a year (or $3,125 monthly) before taxes. Factoring in where you live, that money could pay for your rent, utilities and groceries, even in a newer, condo quality apartment. Your other sources of retirement income will stretch that much further as a result.
For those who wish to invest in real estate without physical ownership, you can always explore one of the many private and public Real Estate Investment Trusts (REITs) available in Canada.
These investments typically pay attractive dividends that can provide you with monthly cash flow.
*Please keep in mind that the above example is just for illustrative purposes. Always consult your financial advisor when seeking professional advice.
Whatever you decide, it’s important to always take a cash flow approach to your decision. If you do X, what are the results? The romanticized notion of mortgage free home ownership may be the right choice for you, but it isn’t your only option. With careful consideration, you can find an alternative that best serves you throughout your retirement years.