Is Renting Better in Retirement?

Home Estate Planning Is Renting Better in Retirement?

  • Avatar fasteddie911 
    Status: Physician
    Posts: 304
    Joined: 05/31/2016

    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?



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    I don’t think there’s any way to tell if someplace is a permanent rental.  I’m not sure what type of places you’d be willing to rent but to me the most stable rental is in a rental complex, owned and/or managed by a single company.  Some cities seem to have better options for this than others.  I’ve lived in a few places like this and it just seems like a relatively stable place to rent.

    #75138 Reply
    ENT Doc ENT Doc 
    Status: Physician
    Posts: 3524
    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.

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    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.

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    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.

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    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.

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    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.

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    Good points, and I think this comes down to a personal decision really.  If someone has a retirement plan with enough buffer/protection to survive an immediate downturn (ability to do part time work, multiple years of cash in savings, a very low planned withdrawal rate) then I think the marginal effect of the sell house decision to rent is negligible.  However, if you are using your house as a fall-back cushion, either to do a reverse mortgage or sell that’s fine too.  To each his/her own.  Just as long as one is aware of the risks/opportunity costs on either side and are comfortable with this.

    #75175 Reply

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