Retiring Baby Boomers Face a Choice – Rent or Buy?

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buy or rent concept, text on the sand, real estate

As Baby Boomers retire, they often consider downsizing their home. This especially true of “empty nesters,” whose children are grown and have moved away. The question is, should they buy or rent?  There are good arguments for doing either. Aside from financial considerations, it depends on how Boomers envision their retirement.

It used to be that owning your own home was an investment that could be expected to appreciate over time. As we have learned during the Great Recession, this is not necessarily the case. So let’s simplify the decision of “buy versus rent” by removing any expectation of investment appreciation as a factor in our considerations.

Looking at “buy versus rent” as a strategy where the right answer is different for each person or family based on their unique circumstances, the benefits and risks associated with each choice can be generally summarized as:

Factor Buy Rent
Major Benefits Postpone some or all of taxes on capital gains from the sale of your previous home. May be only option if you went through a foreclosure, deed-in-lieu of foreclosure or short sale.
After down payment, typically – but not always – enjoy lower house payments. Takes less money to accomplish and it’s faster to get into a retirement home.
Annual tax deductions help higher-income retirees. Not tied down to one place – can move if you want.
Enjoy more control over a property than a tenant. Savings may do better in financial investments other than the real estate market.
Creates estate value for heirs. Savings have more liquidity than being tied up in real estate.
Annual housing costs are typically less than owning a property.
Major Risks
Property values could decline. Rent may go up over time. Owner could sell out from under the tenants, forcing a move at the end of a lease.
Not easy to relocate if necessary due to illness, job, divorce, etc. Renters forego many tax breaks.
Depending on location, annual costs (PITI, maintenance, HOA fees, etc.) are typically higher than renting. Depending on the amount and circumstances, you could be taxed on the profit from the sale of your previous home.
Less liquidity – it can take a long time to sell a residence. Stocks or mutual fund investments could decline in value while property values increase.

In the final analysis, much of it comes down to personal preferences.  Many retiring Baby Boomers simply do not want to be tied down to one location. They would rather rent homes in different locations during their retirement years. Others desire the security of property ownership. Owning a home, however, is not for everyone. And Boomers may be the first generation in quite a while to abandon traditional home ownership during retirement in favor of mobility and more freedom.

Which choice is better? It really depends on each Boomer’s unique circumstances. Retiring Boomers who have a nice financial nest egg and are in a higher tax bracket are generally better off buying a retirement home rather than renting. Those Boomers who have been financially hurt by the Recession are likely in a lower income bracket and may have dings on their credit score too. They are probably better off renting. Remember, renting rather than buying a property preserves quick access to liquid investments that would otherwise be tied up in a real estate.

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