Downsizing: Should You Own or Rent in Retirement?

Downsizing: Should You Own or Rent in Retirement?

When preparing for retirement, there are countless decisions you must make. Among the numerous questions to ask yourself, perhaps one of the most fundamental questions surrounds the future fate of your home. Where are you going to live for your golden years?
 
As you get older and your kids have left the nest, you may find your home is simply too big given your current needs (or wants). This unnecessary surplus of space simply means there are more rooms to keep clean and you are required to pay greater property taxes than you would on a smaller property. Moreover, you may incur considerable costs associated with the home renovations you will have to do to ensure your home remains safe and accessible to you in your elder years.
 
So, what are your options? Should you sell your home and use the proceeds of the sale to buy a smaller one? Should you rent? Whether you stay at home, move to a new place, or decide to rent, there are financial and lifestyle factors to consider.
 
 
Things to consider before selling your home
 
If you are approaching retirement age, it is likely that you have paid off most, if not all, of your mortgage. So, ask yourself: “do I need to downsize?” Here are some things to consider before putting your house on the market.
 
Current market value of your home.  One of, if not the most crucial thing to think about if you are considering selling your home is the current market value of your house. How much you are able to pocket for the sale of your home, after deducting real estate and commission fees, will help inform your decision if it is best to sell or not. While property and real estate are expected to appreciate over time, this may not always be the case given unpredictable housing markets and changing urban landscapes. If your home has depreciated in value over time, and its sale will not provide you with sufficient funds to afford a suitable new living situation, maybe selling your home isn’t the best option.
 
Smaller house, nicer area.  Further, when people sell their homes in retirement to downsize, they typically look to purchase a smaller property in a more desirable location (i.e. on a beach or golf course). Although your new home will be smaller, you may have to pay an inflated price given the desirable location of your new home. It is important that you don’t assume that by downsizing to a smaller property, this property will inherently be less expensive. Do thorough research on the prices of real estate in neighborhoods and areas that you would want to live in. This will allow you to explore your options and ensure that you aren’t caught by surprise by the prices of prospective homes.
 
Capital gains. Another financial consideration when selling your home are the tax implications associated with the sale. In Canada, an income tax benefit called the ‘principal residence exemption’ protects you from having to pay taxes on any gain from the sale. This is only applicable if the residence you are selling is your principal residence. See if your home qualifies as a principal residence here.
 
 
Financial considerations: owning vs. renting
 
If your finances are tight approaching retirement and you’re counting on the proceeds from the sale of your home to form a substantial part of your retirement nest egg, you must ask yourself: “which is the safer investment – real estate or stocks?”
 
This answer is not simple. Given the heightened volatility of the stock markets in recent years, and the inflated real estate prices in many Canadian cities, you are taking on some risk no matter the decision you make. There are both advantages and disadvantages associated with your choice to own or rent.
 
Owning
 
Assuming you have paid off your mortgage, the only fees you would have to pay to stay in your current home, then, would be annual property taxes, utilities, home repair and maintenance fees and the costs associated with renovations.
 
Owning a home makes you responsible for home repairs and renovations. While this is an additional financial consideration, there are several national and provincial programs that help pay for home renovations related to aging. For example, the Home Accessibility Tax Credit, offers Canadians over the age of 65 a grant that covers the equivalent of 15% of the cost of home renovations, up to a maximum of $1,500.
 
A 2017 study conducted by the Canadian Association for Retired Persons (CARP), revealed that 62% of respondents were entirely unaware of tax benefits and government grants that are available to help subsidize aging-related home renovations. So, while owning in retirement means that you will have to pay for these necessary renovations, there are a number of programs designed to help you with these costs. 
 
Renting
 
If your finances are tight during retirement, look at how much of your wealth is wrapped up in your home’s equity. It is not uncommon for retirees to be ‘property-rich, but cash-poor’. If it seems as though you do not have enough cash to afford daily necessities and pleasures, selling your home can put the money that was tied up in your home’s equity back into your pocket.
 
Let’s say you decide to rent and have found a good place with a rent that you can happily afford. Be weary - don’t forget that your landlord can increase your rent. Ensure that the amount you budget for rent in retirement can sustain you even in the event that rent prices increase substantially.
 
 
Lifestyle considerations: owning vs. renting
 
The decision to stay in your current home, downsize, or rent, is not only a financial decision, but a lifestyle one, as well. There are both advantages and disadvantages that come with choosing to rent or own. In regards to lifestyle, how much you value decision-making control, responsibility, freedom, and your travel aspirations can also inform your decision of where to live. Your emotional attachment to your home, and therefore willingness to sell, should also not be underestimated when considering downsizing.
 
Decision-making control. If you have owned your home for the past few decades, you have likely become accustomed to the benefits that home ownership offers you. When you own your home, you retain greater control over certain aspects of your life. For example, you have ultimate power to make decisions regarding how you choose to decorate your home, how your repairs will be done, if you want to have pets, etc. Many individuals that choose to rent in retirement have reported that one of the hardest things to adjust to after moving into their rental unit is having to give up the ultimate control they have become accustomed to after years of home ownership. It is important to note, too, that if you decide to downsize and purchase a condo, you will also have to relinquish some of your decision-making control and follow condo rules.
 
Responsibility. Some people want to relieve themselves of responsibilities in their retirement years so they can focus on other things. Generally speaking, renters have less responsibility than owners do as they only have to worry about paying rent. The landlord or home owner has to deal with all property management, maintenance and home repairs, adjusting to evolving home by-laws, paying utility and property bills, and other matters.
 
Freedom. If you crave freedom in your retirement years, renting might be a more suitable option for you. If renting, you have more freedom to get up and leave if you so desire (provided you do not break your lease agreement).
 
Travel. Similar to above, if you intend to travel a considerable amount throughout your retirement, renting can provide you with greater freedom to do so. By not having your wealth tied up in home equity, selling your home and renting may resolve liquidity issues that could be a barrier preventing you from travelling.
 
Emotional attachment. In 2017, the Canadian Association for Retired Persons (CARP), conducted a report that highlighted the most common reasons why Canadian retirees choose to age-in-place. Among other reasons, 66% of respondents answered that a factor that contributed to their decision to not sell their home was due to strong emotional attachment. Two retirees reported “I love my home too much to leave” and “I was born here, I raised my kids here, so I will die here”. While some retirees don’t have the option to stay in their family homes due to financial pressures, it is still important to recognize the power that our emotions have on our decision-making processes.
 
 
Conclusion
 
It is evident that the decision to rent or own in retirement is not an easy one. Among all the variables involved in making the decision, including the market value of your current home, the robustness and liquidity of your retirement nest egg, and various retirement lifestyle considerations, one thing is certain: one size does not fit all.
 
Please reach out to the Bongard Wealth Advisory Group and we can help you assess your personal financial situation to find the best solution that satisfies both your current needs and your retirement goals.