As you entire retirement age, you may think of downsizing. Many retirees find their current home too large, forcing them to make the decision to buy something smaller. However, what many people don’t think about is the cost of the new home. It doesn’t make sense to buy a smaller, yet just as expensive home. Where is the savings? Many older people are then faced with the decision, do they rent or own?
While it’s clearly a personal decision, there are some factors you should definitely consider. Renting and owning both have their pros and cons. Renting leaves you with less responsibility yet you are at the risk of increasing rent costs. Owning gives you the chance to gain equity in the home, but leaves you with many responsibilities and interest charges to pay if you take out a mortgage.
What Should Retirees’ Housing Costs Be?
Retirees are often on a fixed income. This could make it difficult to rent because, as we said above, rent costs often increase. Generally, a 3-5% annual increase in rent is normal. As the years pass, you could find rent unaffordable where you are, forcing you to move yet again.
So how do you decide what is right? Try keeping your housing costs between 15% and 25% of your annual income. If you have a fixed income for the remainder of your retirement, it makes sense to budget this way. If you know rent will increase, you can predict just when it might become unaffordable to live in that particular rental.
Keep in mind, this figure includes maintenance, insurance, taxes (if you own), and any other housing related costs.
Buying a House Outright
Many people have the ability to buy a smaller home outright. They sell their current home, pay off any remaining mortgage balance, and buy a new home without a mortgage. They then own the home free and clear. If they downsize in value as well as size, they could put themselves in a great position. Hopefully, you put some money in the bank and you own your home without a mortgage.
However, don’t forget, there are still housing costs you must cover. Generally, you can expect to pay 3% of your home’s value in maintenance, taxes, utilities, and insurance costs. For example, if your home is worth $200,000, it may cost you $6,000 a year in other fees.
But, it doesn’t make sense to own a new home if you don’t downsize financially. Let’s say you sell a $500,000 home because it’s too big. You then go and spend the entire $500,000 on a 2-bedroom condominium. Yes, you downsized, but you don’t have any money in your pocket. You’ll still have around $15,000 in annual fees to maintain the condo. Costs this high would mean you’d need an annual fixed income of around $100,000.
When Does Rent Make Sense?
Just about 50% of renters since the year 2005 have been retirees and for good reason. You don’t have to worry about maintenance or taxes. That takes away the 3% worry. The landlord should handle all maintenance and upkeep. You will need to have insurance, but only to cover your personal liability as well as your personal belongings. You won’t have to cover the structure, which should save you a significant amount of money on insurance.
Retirees often enjoy renting because they can pick up and move when their lease expires. You don’t have to worry about selling your home, paying realtors, and dealing with taxes and other costs involved with selling a home. However, as you age, how often do you really want to move? It may make more sense to pick a home that you can afford the rent now as well as 10 or 20 years from now as it increases, based on the standard 3-5% annual increase.
Opting to rent or own really depends on your financial situation. Keep in mind, healthcare costs often double as you near the end of your retirement years. This will greatly eat into your annual income and/or profits. Doing your best to budget now as well as over the next couple of decades can help you make the choice that suits you and your family the best.