Housing Choices in Retirement: Stay, Downsize, or Rent?

In retirement, you might start to consider changing your living situation. “Should we stay in our house?” “Is it better to sell our house and move into a smaller place?” “Is renting a good idea?” These are the financial questions I have pondered from time to time, and which other retirees and near-retirees have asked me on many occasions.

As with so many financial questions, the correct answer is: It depends! There is no magical, one-size-fits-all solution. You will need to consider your personal situation, preferences, future plans (short-term and long-term), in addition to your financial position. Each choice has several advantages and challenges you should consider as part of your decision-making process.

Stay in Your Family Home

Advantages include already knowing your neighbours and neighbourhood (of course, some might see this as a disadvantage if you don’t like your neighbours!). There is a sense of familiarity with your current home; you recognize every creak and groan, and you have an intimate knowledge of what has been renovated, repaired, and ignored. If you have lived in your house for a significant number of years, you may also be mortgage-free. The mortgage-free element is seen by many as the strongest financial reason to stay in place, however, this can also be a disadvantage!

Disadvantages of staying in your family home include maintenance costs (money and time), property taxes, and insurance obligations. A major hidden cost is something called “opportunity cost.” Opportunity cost is the loss of potential income you experience when choosing to put your financial resources to an alternate use. If your house has a net value (after paying all projected selling costs) of $500,000, that money is locked into your house. If you could invest that $500,000 and get an annual return of six percent, the opportunity cost would be $30,000 annually, or $2500 monthly (500,000 x .06 = 30,000).

If you can manage a higher rate of return or have a higher net value, then your return (and opportunity cost) would be higher. Lower numbers would lead to a lower opportunity cost. Assuming this is your principal residence, there are no capital gains taxes to worry about. Obviously, you would still need a place to live — we will cover that in the rental portion of this article.

Downsize

Many retirees consider moving into a smaller house in the same city, or perhaps in a totally new location. Often, they move to be closer to their grown children and grandchildren, or perhaps desire a warmer locale.

Advantages to downsizing could include freeing up capital for other purposes. Of course, this assumes your family house sells for more than you pay for your downsized house. You still need to fork over some of your pension income for insurance, property tax, and maintenance costs, but a smaller house should translate to smaller amounts. Whatever excess cash you realize from the sale can be put towards that long-delayed bucket list holiday, the purchase of a new vehicle, or invested to generate additional income in your retirement.

Advantages of choosing to downsize to a condo include lower purchase price (depending on size, amenities, and age), no outside maintenance requirements, as well as the ability to lock up and hop off to wherever, whenever.

Disadvantages of downsizing are the continued costs of insurance, property taxes, and maintenance. The opportunity costs explained above are still a factor, but a less expensive house would have lower property taxes and opportunity costs.

Disadvantages of condo living include condo fees that can range from $300 up to $700 per month. These fees cover maintenance of common areas, perhaps some utility costs, as well as a reserve fund contribution (for long-term maintenance costs like roof repairs, heating and AC requirements, etc.). Typically, the more amenities a building has, the greater the condo fee. In addition, condo rules may control whether pets are allowed, when you can use the amenities, appearance and alterations of your unit, and the number of people who can live with you in your unit. A look at condo bylaws is a must before choosing this downsizing option.

Rent

Advantages of renting see the elimination of property tax payments, as well as maintenance and repair costs (your landlord probably includes those in your cost of rent). In addition, you have the flexibility to move much more easily within your city, province, or country of choice. After selling your house, you will have eliminated what some people call being “house rich, cash poor” — you are now house eliminated, cash rich! Remember our opportunity cost calculations earlier? If we continue the discussion above, you now have about $2500 to pay your monthly rental costs. If you think you have even more value in your house, you would have an even greater amount to contribute to your monthly living costs, or you could save and invest the difference for other desired purposes.

Disadvantages of renting will include rent increases from time to time, dealing with sometimes less than cooperative landlords, unanticipated changes of landlords, and possible eviction (through no fault of your own). Pet policies and decoration choices may be restricted by your landlord as well. Rental rates have been rising steeply in some areas of the country. If your house net value and opportunity cost investment isn’t enough to cover the rental cost of your choice, it may be more reasonable to focus on the staying put or downsizing options.

Keep in mind what you decide today may change in ten years. Also, what works for a friend, co-worker, or family member may not work for you. This is more than just a financial decision, and the discussion may take more time than you expect. As always, major financial decisions should be made in consultation with financial professionals. Whatever your choice, remember: a house is just a place to live — a home is where loved ones live and gather to celebrate life.

Ray Hoger
Chair, Pension & Financial Wellness Committee

Ray Hoger is passionate about retirement finances — but don't take his word for it! Always consult a qualified financial professional before making any decisions regarding your financial future.