You may think that it is better to own your home than to rent in retirement.
But then you get a sky-high bill for roof repairs. Or your condo board may approve a special assessment. Or a pipe bursts in the winter. Or the air conditioning breaks down in the summer. Or you need to replace a major appliance. Or your city or town is raising property taxes.
And then you think about why it’s not always terrible to be a renter.
A new study from money manager T. Rowe Price on retirement spending reveals two things that will likely come as a surprise to many people – especially those who haven’t yet retired.
The first is that expenses are much more volatile from year to year than you might think.
And the second is that it is these home costs, not health care costs, that are usually the root cause.
In terms of spending volatility, the study found that over a two-year period, about a quarter of retirees experienced an increase in spending of at least 17%. Perhaps even more remarkable is that more than one in five retired households experienced an increase in spending of at least 50% for at least one year during their entire retirement.
“That is why we emphasize the need for liquidity,” the study’s author, Sudipto Banerjee, told MarketWatch.
This was based on a survey of a representative sample of 1,306 households over a 14-year period, from 2005 to 2019. The data came from the University of Michigan’s long-term Health and Retirement Study and the supplemental Consumption and Activities Mail Survey.
For most households, these sudden increases in spending were the result of “non-discretionary,” that is, necessary, spending, found T. Rowe Price (Only among retired households with incomes above $150,000 per year were there large jumps in spending the result of discretionary spending – in other words, choice.)
And the biggest cause was home-related or housing costs. These accounted for as much as 25% of retirees’ cost volatility, compared to just 5% for health care costs and 3% for transportation.
Renting and owning a home both come with benefits and risks. Homeownership allows you to build equity, with leverage, as long as prices keep rising. This can also protect you against the risk of rising rents.
But the benefits don’t always run in one direction. Housing is an illiquid asset: it is not always easy to convert it into money. As T. Rowe Price’s research shows, this exposes you to the risk of high costs, but also to the hassle of actually solving problems. If you rent, that’s the landlord’s problem. Renting also allows you to access buildings with facilities, such as gyms and swimming pools, and so on, that are not easily available to a homeowner.
And sometimes, especially during housing bubbles, renting costs less per year than owning.
US home prices are now 44% more expensive nationally than just before the pandemic, in February 2020. And according to Realtor.com – which, like MarketWatch, is owned by News Corp. – they are even declining.
Since American housing affordability is now very poor, while payout rates on lifetime annuities and inflation-protected government bonds are now much better than they used to be, retirees can always run the numbers on selling their home and putting the money in bonds or an annuity fuses. and rent. And you never have to worry about calling a plumber again.