Baby Boomers have become one of the major drivers of rental demand over the past decade. Boomers also accounted for twice the growth in renter households as millennials did since the recession — and their ranks will only grow as more Boomers reach retirement age.
But is renting in retirement a smart financial decision? Boomers are weighing a different set of factors than millennials. Many Boomers already own a home and may be looking to downsize in favor of less maintenance — and perhaps a warmer climate. Boomers should already have built their assets. Now they should focus on making sure their money stretches through their golden years.
We talked to two financial planners— and came up with three critical questions Boomers should ask themselves as they weigh whether to rent an apartment in Mooresville, NC.
How long will you live there?
The five-year rule of thumb still applies to Boomers: Buying a home only makes sense if you plan to stay there at least five years. Closing costs, realtor’s fees and moving expenses make homeownership an expensive upfront proposition, and it takes time to make that money back through appreciation.
That’s an obvious piece of cautionary advice for Millennials who have yet to put down roots. But Boomers often fail to grasp how quickly their lives can change as well. Dreams of retiring in a secluded mountain cottage can fade once a grandchild is born. Florida may seem like paradise — until summer arrives. Or plans to travel the world can be sidelined by health complications.
Flexibility in housing is important as we get older. You want to be able to understand what the end game can be for us.
What else could you be doing with your money?
The standard argument against renting is that monthly payments are the equivalent of flushing money down the drain.
But Boomers should be thinking about the best way to deploy what they’ve already accumulated.
See the bigger picture: Real estate should be just one part of a broader retirement portfolio. A house is a large but relatively illiquid asset, meaning that it’s hard to access the equity in your home to pay for a medical expense or a trip to Spain.
Boomers should focus on making their savings work as hard as possible for as long as possible. That might mean selling the family home, putting some of the proceeds into a brokerage account and renting an apartment. Diversifying the potential sources of income during retirement also creates greater flexibility in tax and estate planning.
What social services do you need?
Buying a home also means paying property taxes, which many jurisdictions use to pay for schools — a public service that Boomers generally do not use. But renters still pay that tax indirectly because it’s usually factored into the monthly rate for an apartment. Instead, retirees should be on the lookout for jurisdictions that levy special taxes to fund education.
Health care should be a critical component of Boomers’ financial plans. Medicaid could help ease the burden, some Boomers may choose to spend some of their savings in order to qualify for long-term care benefits.
Planning for the next stage in life can mean confronting uncomfortable but necessary topics. That’s the key to ensuring the golden years don’t go bust.