Over the past decade baby boomers have been the drivers of rental demand. According to a survey by Harvard University’s Center for Housing Studies, boomers have accounted for twice the growth in renter households as millennials did since the last recession. As boomers reach retirement age their ranks will continue to swell.
However, is renting during retirement really a smart financial decision? Experts suggest that boomers are using a different set of factors from millennials to weigh their decision. The most obvious is that many boomers already own their home and are looking to downsize. They may wish to have less maintenance concerns or move to a warmer climate. Home ownership is a way for millennials to increase their wealth, while boomers have already built their assets and are looking for ways to stretch their money through retirement.
In a recent study, several financial planners developed three important questions boomers should ask themselves when deciding to rent or buy.
How long you plan to live at the location is a critical question to consider. Buying a home makes sense if you will live there for a minimum of five years. Initial expenses, such as closing costs, realtor’s fees, and moving expenses make home ownership a costly upfront proposition. However, a new grandchild, unexpected health issues, or sidelined travel plans can make relocation dreams fade quickly. Flexibility as we age becomes important.
Another issue to keep in mind is the other ways your money could be working for you. For millennials, renting may seem like throwing away money. For boomers, liquidity becomes an issue when confronted with a medical expense or an extended vacation. It might be more sensible to sell the family home, put the proceeds into a brokerage account and rent a condo. The resulting portfolio may provide more flexibility and possibilities. The bottom line for boomers is maximizing cash to do all the things they’ve dreamt of doing.
Finally, boomers need to consider which social services they may need. Owning a home means paying property taxes. Retirees should be alerted to which jurisdictions levy special taxes to fund education. Especially important to the financial plans of the boomer generation is the issue of health care. While Medicare and/or Medicaid may help ease the burden, consideration must be given additional premiums chosen for supplemental assistance or long term care benefits. In these instances, owning a home may be the best option, as the government may not claim the house to recover medical payments if a spouse is still residing there.