Retirees often sell their homes to help fund retirement. But what if you have no house to sell? The share of renters has gone up, especially among millennials. Student loan debt, high housing prices and the desire to live in a big city keep many from homeownership.
Buying a home is no longer the pipe dream it once was. But how does renting change your retirement savings plan? Can you still retire without buying a house?
The answer is “yes” — as long as you’re diligent about investing and have a solid plan in place.
Investing the money you would've spent on a home
The down payment
To buy a $450,000 home with a 20% down payment would call for $90,000, plus additional costs. Instead of stashing this cash in a savings account, invest it in stocks and mutual funds. Invest as early as possible, taking advantage of compound interest, and set yourself up for a secure retirement.
Besides the outright price on a new home, you’ll also have to pay to maintain it. The average homeowner spends $1,105 per year to do so, according to a report by Home Advisor. As a renter, you can use this money to pad your retirement investments.
Selling a home incurs significant costs that are often overlooked. Take realtor commissions, which run an average 6%, according to Realtor.com. Sell a $450,000 home and you may owe the realtor $27,000. Additional selling costs include home updates and capital gains taxes. This money can alternatively be invested if you’re a renter.
Preparing for rent in retirement
Rent prices have been steadily increasing for decades. Anticipate these costs in retirement by preparing ahead. Some experts advise budgeting for a 3% inflation increase every year.
Assuming rent prices will stay the same throughout your entire retirement could lead to serious cash flow issues down the road.
If possible, seek a rent-controlled apartment for your retirement years. Cities like New York, Los Angeles and D.C. have rent control laws, which only allow landlords to increase rent by a certain percentage each year. When you know how much your landlord may charge every year, it will be easier to prepare financially.
Another renting alternative? Rent from an individual landlord over a large company, which typically allows more control over housing costs. You’ll also be able to save on costly moving expenses, which can add up over the course of your retirement.
Not saving for retirement? Here’s how to catch up.
Image: EMS Forster Productions