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Retirement is coming soon and not only are you thinking about where you’ll live, but also how. Are you going to own your place, knowing you’ll be able to control your circumstances, build equity, and leave a legacy? Or are you going to maximize your flexibility by renting? Renting means no maintenance and no commitment. Most near-retirees are unsure or even second-guessing themselves about where and how to live in retirement. With mortgage rates and rents going up, and home values fluctuating daily, it’s hard to plan for the future.
If you’re struggling with the “own or rent” question, a good start is to ask yourself some basic questions.
If you’re not only close to retiring, but also ready to make a decision, then you need to do your homework right away. Mortgage rates have gone up dramatically in the past year, making owning a bigger financial commitment than in the past. However, housing supply is strained, which runs up the costs of both buying and renting. Either way, you’re likely looking at higher housing costs. So, if you’re going to decide soon, then decide very soon.
For example, are you planning on aging in your current house? Or will you stay in town, but downsize? Perhaps you are toying with a change; maybe a full or part-time change of scenery to a new location. This is often a difficult decision because your ties to family and community conflict with your desire to get a fresh start in retirement. A good way to narrow down the decision is to assess where you want to be geographically. Do you want to move away and start fresh, or do you simply want to take baby steps as you move into retirement? Maybe kick the tires of living in a nicer climate, but don’t commit yet. The more unsure you are, the more renting is likely the better option. Homeownership is a particularly big decision when you’ve never lived in the area before.
Contrary to popular belief, for most retirees, housing is their biggest expense. Even if their house is paid off. Whether you pay a landlord for the maintenance of your apartment or pay a contractor for work on your house, you will still have ongoing costs. This may lead some retirees to decide to age in their existing house. The mortgage is paid, so why incur the costs of a move? Staying put can be a great decision, as long as there’s recognition that this doesn’t take away the need for continuing cash flow.
There are not just costs for mowing, snow removal, and taxes, but also capital costs like a new roof and painting. Further with age you may need to update your place to be senior-friendly — door handles instead of knobs, a walk-in shower, and a master bedroom on the first floor. Renting doesn’t necessarily avoid these costs; it just puts them into the identifiable monthly expense of a lease. This expense, however, can go up and doesn’t provide any equity in return.
The snowbird phenomenon has been popular, especially during a prolonged period of cheap mortgage rates. Technology has greatly aided retirees who want to live in two different locales. Easier communication with the family, smart appliances, and electronic banking all contribute to the ability to live comfortably in more than one residence. This has led to a blurring of the traditional rent-versus-own debate.
Some own in one place and rent in the other; some own in both; and some rent in both. Especially with the quickly climbing costs associated with financing housing, if you’re planning to be a snowbird, get your numbers in order before you fly the coop. Also, build in some cushion. Take for example a move to Florida. In light of Hurricane Ian, property insurance may be tougher to obtain and at a higher cost. As with all housing, snowbirding has some hidden costs.
Framing the retirement question in terms of renting versus buying may draw too big of a distinction between the two. For many retirees, the question is more about costs than legal ownership.
If you plan to move out of your single-family home and into a condo or townhome, be sure to understand the costs. Many of these developments are targeted at seniors, and they offer a lot of age-friendly amenities such as pools, a community room, etc. However, these amenities have costs. For some, the big surprise is the Homeowner’s Association (HOA) fee. This monthly bill typically reflects ongoing maintenance costs such as landscaping, garbage removal, etc., but also includes an amortized capital contribution for big-ticket expenses such as road improvements and a new roof.
New owners tend to initially think of the HOA as the landlord, but quickly learn that they can’t separate themselves from the responsibility of costs associated with the common grounds. Before committing, ask for the HOA documents, and discuss them with a current owner. Are any major capital costs anticipated soon? How recently has the HOA fee been raised? What’s included in the association’s services? To be sure, inquire about insurance costs. Not all condominiums have the same rules about common versus individual insurance coverage.
In the United States, two well-known living arrangements are specifically designed for healthy retirees: Active Adult Communities and Continuous Care Retirement Communities (CCRCs). In general, Active Adult Communities are large retirement communities for individuals aged 55 and up. Think Sun City in Arizona and The Villages in Florida. CCRCs are different. They are a place where you have access to multiple levels of care on a single campus. The primary benefit of this kind of arrangement is you can likely stay in the same place with the same people even if your health changes down the road.
In both cases, you are typically an “owner” versus “renter” of your residence, but because of the common amenities involved, expect there to be significant ongoing monthly expenses. If you’re planning on moving to one of these facilities, it is crucial to understand not only the upfront expense, but also the continuing costs. Particularly with CCRCs, there are several different kinds of contracts that are offered by the facility, and they can vary considerably in terms of the level of ongoing expenses and guarantees provided. If you want to leave a legacy to your family when you’re gone, it’s also important to understand what happens to your property upon your passing. You may own the property, but that doesn’t address restrictions and contractual obligations.
In thinking through the “own versus rent” question, it’s easy to forget the financial opportunities that home equity represents. For many pre-retirees, their primary asset is their home, and particularly in the current housing market, this wealth should not be ignored. One obvious way to tap home equity is to sell and downsize. This adds immediate retirement capital and provides an opportunity to rent while deciding on retirement plans. However, there are also ways to tap home equity without selling.
Primary among these ideas is a reverse mortgage. With a home equity conversion mortgage, you can obtain a loan that only has to be paid back out of the home equity when you sell or otherwise leave. This on-demand loan can be used to provide ongoing retirement income or pay off an existing conventional mortgage. Some even use a reverse mortgage as a line of credit to access when there are bad equity markets, such as the one we’re currently experiencing. Just be aware that reverse mortgages have high upfront expenses and are not designed as a quick-fix solution to retirement income.
Top of mind for many near-retirees are social security, Medicare, and leaving employment. Still, you’ll spend the majority of your retirement time in your home. It’s important to think through where your home will be and how you’ll pay for it. Ask yourself the questions above, keep in mind the hidden considerations, and decide to decide. You may choose to rent and put off a final decision. Downsizing is another avenue. You may also want to stay in place, and make improvements. Just keep in mind that the costs of housing and financing are in a state of flux. Get out ahead of this retirement decision now.
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With an over 40-year career as an attorney, financial advisor, executive, and professor, Steve brings a wealth of experience in dealing with retirement and estate planning issues. He uses his position as the Co-Director for the Center for Retirement Income at The American College of Financial Services to pass along current information and new ideas for people contemplating — or experiencing — retirement.