Should you rent in retirement?

By Bankrate.com

As the certainties in financing retirement have evaporated, at least you can count on one asset: your home.

Despite the recent slide in the housing market, you've seen the value of your home rise over the years. If you're among the fortunate 69% to 80% (depending on the source) of the over-65 population with a home owned free and clear, you're in even better shape.

Owning your home after years of sweating to pay off a lender is sweet. But is it a good idea to stay in that home throughout your retirement?

Many retirees elect to downsize, buying smaller homes or condos. Others are venturing into uncharted waters by renting -- with some investing the money they receive from selling their homes.

"I am a 75-year-old woman who rents a two-bedroom apartment in a four-unit apartment building," says Emily Kimball, a motivational speaker and the owner of The Aging Adventurer in Richmond, Va. "I feel much more comfortable paying rent and having their handyman come and solve my maintenance problems. I have assets, but they are for future health problems or more travel and adventure."

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When deciding whether to stay in your present home, buy something else or rent, you should take two factors into consideration: finances and emotions. Renting may make economic sense, but if a great deal of your emotional security comes from the stability of owning your home, it may make sense to own. On the other hand, if you'd rather live without the headaches of maintaining a home, renting may have more appeal.

Your home as an investment

Conventional wisdom and the real-estate boom of the past few years have fostered a mentality that your home is a good investment, one that can help finance your retirement as certainties around company-financed pensions and the viability of Social Security have faded. Unfortunately, it's not true.

Though a home provides a roof over your head and limited appreciation potential, a study by the Fidelity Research Institute reveals that home prices have risen an average of 5.9% annually since 1963. Home prices are certainly capable of sharp run-ups in values, but they also tend to decline, sometimes for long periods.

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A home is not only expensive to maintain, but mortgage-interest costs add hundreds of thousands of dollars to your homeownership bill, ultimately cutting whatever profit you might receive when you sell. The mortgage-interest tax deduction offsets some of those interest costs and mortgage fees, but not as much as you might think.

When calculating the potential profit from selling your home, don't forget to deduct continuing expenses: mortgage interest, property taxes, insurance, maintenance, major repairs and renovation projects.

Renting temporarily

If you're not sure which way to go and are determined to sell your house, Mike Dorula, a certified public accountant, recommends renting on an interim basis. That is especially useful for retirees who want to relocate to a new community.

"Many seniors who are considering moving to a specific retirement community or to a new area rent first to make sure they like it," Dorula says. "My sense is that renting is cheaper in the short run but more expensive in the long run."

This approach can work to test the waters of renting in general to see whether it's for you. But before taking the plunge of renting on an interim or permanent basis, make sure to factor in all the costs of renting. Many would-be renters forget to include renters insurance, security deposits and extra fees for covered parking spots and other amenities when they make their cost calculations, says Marion Somers, a geriatric-care manager in Brooklyn, N.Y.

Economics of buying versus renting

	Owning	Renting
Building equity	Yes; the amount depends on years left in mortgage	No
Tax deduction	Yes, for mortgage interest	No
Property taxes	Yes	Included in rent
Stable payment	Yes, with a fixed mortgage; property tax, insurance and condo/co-op fees can increase	No; rent and insurance may increase yearly or even more frequently
Maintenance	Yes	No
Renovations	Yes	No
Appliances	Yes, must buy and repair	No
Other potential expenses	Mortgage origination and refinancing costs	Security and pet deposits, and agent commission

Continued: Arguments against renting

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