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Is Renting Better in Retirement?

Home Estate Planning Is Renting Better in Retirement?

  • Avatar Bmac 
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    Status: Physician
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    Joined: 10/21/2017

    I think there are two somewhat separate issues.

    1. Better to downsize to a smaller home, townhouse or condominium.

    2. Better to buy vs rent.

    From a lifestyle standpoint and how we envision the first 20 plus years of retirement, the answer to the first is a 2-bedroom condominium (although our kids will probably disagree).

    For the second, I think it is the risk- and hassle-averse sides of me that think owning would be better. I feel like property tax, HOA fees and insurance would be relatively predictable over time whereas rent/lease numbers and possibly sudden need to move would be less so. And I am also basing this on thinking of a condo rather than single family home with regards to maintenance costs.   My bias may be due to the fact that we have not been renters for over 20 years (and in the same home for over 15) in an area that has had skyrocketing real estate and rent. Although you may well be correct that from a PURELY financial standpoint selling and renting would win over the long term, particularly if you have a lot of home equity.

    At any rate, an interesting topic and one that I will need to ponder a bit more over the next few years as we get closer to downsizing. Which may end up having more to do with what our daughters end up doing.

     

    #74897 Reply
    Avatar Kamban 
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    downsizing by buying a townhouse would be the worst of both worlds. Upkeep/maintenance costs not much cheaper/easier than a single family home. None of the security and privacy of being in a larger condominium building which would make prolonged travel easier.

    Click to expand…

    Depends on how the townhome is built and the HOA structure. We have a couple of rental town homes that we initially purchased more for being located in a good high school district. The HOA fees cover the exterior, trash pick up, shrub maintenance and roof fully. The inside is like a home with 2 bedrooms and 1300 sq feet rather than 2500. But there are enough neighbors to have security even if you decide to go to AZ for a couple of months or travel internationally.

    For me I cannot imagine downsizing below 2500 sq feet even as empty nesters. But who knows what will be my feelings on this in 10+ years.

    #74898 Reply
    Avatar StarTrekDoc 
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    There’s empty nesters who like a nice home; then there’s advanced age.  During my childhood they lived in nice 4500+ home and empty nesting to at 2500-3000 home with entertainment space.   Now that they’re in late 70s-80s; they moved into a condo for ease of living.   They use our house now for entertaining guests, lol!

     

     

    #74903 Reply
    Avatar fasteddie911 
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    Status: Physician
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    Joined: 05/31/2016

    I agree with the potential financial benefits of selling a home and then renting, even if the home value just kept up with inflation, that’s money you can use as opposed to having it “sit” within the value of the home. I’m not sure what I would do when that time comes, and I recognize the pros/cons of owning vs renting, as well as a house vs condo/townhouse, I don’t feel strongly one way or the other for any of those options.  However, I could see the benefit of living in a condo in later years as mobility becomes an issue, as well as the potential social and safety benefits of living in that type of setup.  By finding a building setup for renting with a single management company, some concerns with renting can be minimized.  Anecdotally, I haven’t seen anyone around me downsize their home financially in their later years and certainly no one that started renting.  Either they stay put because it’s comfortable, familiar or easier, or they move to a more ideal location or setup that is financially neutral.

    #74907 Reply
    q-school q-school 
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    Why do I even need a house? After I pick my kids careers (actuary) and then their spouses I was planning on living with each of then for six months of the year. So far my wife is not on board so I need a house for her, but my kid is seven so I probably have some time to convince her of the wisdom of the plan.

    What could be better than having me around for six months? I will pay room and board and help them achieve financial independence.

    Plus they probably will need me to babysit some day. I can teach the baby about arranged marriage and financial independence. 🙂

    This guy has a plan.

    #74910 Reply
    Liked by Kamban, ENT Doc
    DMFA DMFA 
    Moderator
    Status: Physician
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    Joined: 06/24/2016

    Why do I even need a house? After I pick my kids careers (actuary) and then their spouses I was planning on living with each of then for six months of the year. So far my wife is not on board so I need a house for her, but my kid is seven so I probably have some time to convince her of the wisdom of the plan.

    What could be better than having me around for six months? I will pay room and board and help them achieve financial independence.

    Plus they probably will need me to babysit some day. I can teach the baby about arranged marriage and financial independence. ????

    This guy has a plan.

    Click to expand…

    Genius.  Love it

    "I like money." - Frito Pendejo (Idiocracy)

    [Not a financial professional (yet), lawyer, or employee of The White Coat Investor]

    #74931 Reply
    Donnie Donnie 
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    I don’t think a financial return as modeled is quite the right way to think about it. Putting home equity into assets that are significantly riskier (as shown in the spreadsheet) than an unlevered house is probably not what most people should be doing in retirement. Most should be dialing back risk. Retirement generally isn’t the right time to be maximizing return.

    #75007 Reply
    ENT Doc ENT Doc 
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    Joined: 01/14/2017

    I don’t think a financial return as modeled is quite the right way to think about it. Putting home equity into assets that are significantly riskier (as shown in the spreadsheet) than an unlevered house is probably not what most people should be doing in retirement. Most should be dialing back risk. Retirement generally isn’t the right time to be maximizing return.

    Click to expand…

    So I disagree on a few points here.  First, the model can be constructed to fit your assumptions – the base model I uploaded may show movement into riskier assets, but those were just numbers I pulled out of thin air and that seemed like a reasonable start.  Second, for most of us physicians (at least those caring to engage on this forum) the home equity is not part of your FI or retirement calculation – only invested assets for retirement are.  So this decision is made on the margin of a plan where you’ve controlled for risk given your proper asset allocation and have enough to live off in retirement anyway.  This model allows you to assess the opportunity cost of keeping equity tied up in an illiquid asset.

    #75032 Reply
    Donnie Donnie 
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    Status: Other Professional
    Posts: 770
    Joined: 01/11/2017

    I don’t think a financial return as modeled is quite the right way to think about it. Putting home equity into assets that are significantly riskier (as shown in the spreadsheet) than an unlevered house is probably not what most people should be doing in retirement. Most should be dialing back risk. Retirement generally isn’t the right time to be maximizing return.

    Click to expand…

    So I disagree on a few points here.  First, the model can be constructed to fit your assumptions – the base model I uploaded may show movement into riskier assets, but those were just numbers I pulled out of thin air and that seemed like a reasonable start.  Second, for most of us physicians (at least those caring to engage on this forum) the home equity is not part of your FI or retirement calculation – only invested assets for retirement are.  So this decision is made on the margin of a plan where you’ve controlled for risk given your proper asset allocation and have enough to live off in retirement anyway.  This model allows you to assess the opportunity cost of keeping equity tied up in an illiquid asset.

    Click to expand…

    The house should be a part of your FI calculations because you either need to (i) include rent plus inflation in your financial planning, or (ii) you need to include taxes, insurance, and maintenance plus inflation. In a recent thread I posted IRR calcs of rent versus buy.  You could have a look there if you wanted to see how I approached the problem.  Buy looks a lot better for higher inflation.  Retirees are not generally trying to accumulate wealth, but are trying to protect assets.  In a highly inflationary environment, owning a house in retirement should help to provide asset value security.

    Edit: The reason I suggested the model isn’t that useful is because you care about the volatility (i.e. risk) of outcomes from the “rent in retirement” strategy.  Assuming a flat [6]% return doesn’t address the increased volatility in the outcomes, which you probably care more about than increasing your death EV by a $10k or $100k.

    #75036 Reply
    ENT Doc ENT Doc 
    Participant
    Status: Physician
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    Joined: 01/14/2017

    I don’t think a financial return as modeled is quite the right way to think about it. Putting home equity into assets that are significantly riskier (as shown in the spreadsheet) than an unlevered house is probably not what most people should be doing in retirement. Most should be dialing back risk. Retirement generally isn’t the right time to be maximizing return.

    Click to expand…

    So I disagree on a few points here.  First, the model can be constructed to fit your assumptions – the base model I uploaded may show movement into riskier assets, but those were just numbers I pulled out of thin air and that seemed like a reasonable start.  Second, for most of us physicians (at least those caring to engage on this forum) the home equity is not part of your FI or retirement calculation – only invested assets for retirement are.  So this decision is made on the margin of a plan where you’ve controlled for risk given your proper asset allocation and have enough to live off in retirement anyway.  This model allows you to assess the opportunity cost of keeping equity tied up in an illiquid asset.

    Click to expand…

    The house should be a part of your FI calculations because you either need to (i) include rent plus inflation in your financial planning, or (ii) you need to include taxes, insurance, and maintenance plus inflation. In a recent thread I posted IRR calcs of rent versus buy.  You could have a look there if you wanted to see how I approached the problem.  Buy looks a lot better for higher inflation.  Retirees are not generally trying to accumulate wealth, but are trying to protect assets.  In a highly inflationary environment, owning a house in retirement should help to provide asset value security.

    Edit: The reason I suggested the model isn’t that useful is because you care about the volatility (i.e. risk) of outcomes from the “rent in retirement” strategy.  Assuming a flat [6]% return doesn’t address the increased volatility in the outcomes, which you probably care more about than increasing your death EV by a $10k or $100k.

    Click to expand…

    The expenses are included in your FI calculation, but the home equity shouldn’t be unless you’re planning on a reverse mortgage as part of your retirement draw-down strategy.  If you add $15k of living expenses because you decided to rent, you need to have the appropriate amount added in investable assets such that a 4% withdrawal rate will allow you to cover those expenses.  In this case that turns out to be $375k.  So if you’re taking out $700k in equity by selling and putting it into your portfolio you lower the effective withdrawal rate of your entire portfolio, which adds a better margin of safety.  I agree that in a high inflationary time it’s better to not have more living costs tied to inflation.

    #75044 Reply
    Donnie Donnie 
    Participant
    Status: Other Professional
    Posts: 770
    Joined: 01/11/2017

    I don’t think a financial return as modeled is quite the right way to think about it. Putting home equity into assets that are significantly riskier (as shown in the spreadsheet) than an unlevered house is probably not what most people should be doing in retirement. Most should be dialing back risk. Retirement generally isn’t the right time to be maximizing return.

    Click to expand…

    So I disagree on a few points here.  First, the model can be constructed to fit your assumptions – the base model I uploaded may show movement into riskier assets, but those were just numbers I pulled out of thin air and that seemed like a reasonable start.  Second, for most of us physicians (at least those caring to engage on this forum) the home equity is not part of your FI or retirement calculation – only invested assets for retirement are.  So this decision is made on the margin of a plan where you’ve controlled for risk given your proper asset allocation and have enough to live off in retirement anyway.  This model allows you to assess the opportunity cost of keeping equity tied up in an illiquid asset.

    Click to expand…

    The house should be a part of your FI calculations because you either need to (i) include rent plus inflation in your financial planning, or (ii) you need to include taxes, insurance, and maintenance plus inflation. In a recent thread I posted IRR calcs of rent versus buy.  You could have a look there if you wanted to see how I approached the problem.  Buy looks a lot better for higher inflation.  Retirees are not generally trying to accumulate wealth, but are trying to protect assets.  In a highly inflationary environment, owning a house in retirement should help to provide asset value security.

    Edit: The reason I suggested the model isn’t that useful is because you care about the volatility (i.e. risk) of outcomes from the “rent in retirement” strategy.  Assuming a flat [6]% return doesn’t address the increased volatility in the outcomes, which you probably care more about than increasing your death EV by a $10k or $100k.

    Click to expand…

    The expenses are included in your FI calculation, but the home equity shouldn’t be unless you’re planning on a reverse mortgage as part of your retirement draw-down strategy.  If you add $15k of living expenses because you decided to rent, you need to have the appropriate amount added in investable assets such that a 4% withdrawal rate will allow you to cover those expenses.  In this case that turns out to be $375k.  So if you’re taking out $700k in equity by selling and putting it into your portfolio you lower the effective withdrawal rate of your entire portfolio, which adds a better margin of safety.  I agree that in a high inflationary time it’s better to not have more living costs tied to inflation.

    Click to expand…

    Agree that home equity shouldn’t be included in your base 4% withdrawal rate calculation, but it does provide protection in a downside scenario.  Other than the 2009 recession, home prices have not declined more than 0.7% in the last 40 years.  Historically, even if the stock market crashes, your home retains value that you can liquidate if you are suffering from sequence of return risk in your other investments during retirement.

    #75049 Reply
    Arkad Arkad 
    Participant
    Status: Physician
    Posts: 113
    Joined: 07/27/2016

    I am in the rent camp. We will sell our home when I retire next year in my early 50s and rent. My wife is totally on board. I can’t wait to be done with the extra rooms we don’t use, the maintenance, etc. We are not sure of long term plans and do not want to lose on commissions if we move in a year or two. We have sold much of our “stuff” in preparation so we are ready and moving from place to place if we decide to test out other cities won’t be too hard. Most likely we will be doing some slow travel and won’t need a big footprint in any one city.

    #75050 Reply
    uptoolate uptoolate 
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    Status: Physician
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    Joined: 01/31/2016

    I agree with the idea that it is likely two questions.  Downsize or not? Rent v own?  I can’t wait to downsize. The decisions will be on the timing and the rent v own question.  Have had a couple of colleagues retire and sell their homes and now renting while they travel and look for the perfect final place.  They are also hoping that the real estate market will correct while they are searching.

    #75051 Reply
    q-school q-school 
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    Joined: 05/07/2017

    most of the places we would rent from make me nervous that the owner would sell at some point   i don’t want to have to move against my will to save a little money.  is there some way of knowing that this is a permanent rental?

    thanks

     

    #75089 Reply
    Avatar StarTrekDoc 
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    Status: Physician
    Posts: 2126
    Joined: 01/15/2017

    One can sign a long term lease agreement; but most have a 90-Day notification of termination clause by either party written into them.  As a med student; we had specific language on our lease to allow for out at semester breaks only — given it  a 180day clause.

    #75132 Reply

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