Where you live in retirement, in contrast to your working years, is not determined by where your office is located or by what schools you want your children to attend. This flexibility is one reason why two-thirds of retirees surveyed by Merrill Lynch in partnership with Age Wave, a firm that studies the implications of population aging, said they had already moved or were likely to move at least once during retirement.
Those who choose to move as part of their retirement plan often do so for convenience and not for economic reasons, said Matthew Carbray, a partner at Ridgeline Financial Partners/Carbray Staunton Financial Partners in Avon, Connecticut. Personal factors such as health status, ability to maintain the home, and accessibility often drive the decision, as do emotional factors such as the need for a community setting (or not), family attachment to the property, and proximity to relatives. (Related: Short retirement horizon?)
Half of retirees who moved downsized, according to the survey. Downsizing brings the possibility of various housing options: buying or renting a condo or house, or renting an apartment. Each choice has unique lifestyle and financial considerations.
Buying a house
The vast majority of Americans 65 and older — four out of five — are homeowners, and almost all of them own their homes free and clear, the Merrill Lynch-Age Wave survey found. So, selling one home and buying another would appear to be a popular option.
But if the purpose of downsizing is to save money, retirees should know that a smaller house can entail many of the same expenses as a larger house, so the savings might not be as significant as you expect. (Calculator: How much to save for retirement?)
Still, if you buy the home outright, there will be no monthly payment to eat into your cash flow.
You could also take on a fixed-rate mortgage to free up equity, and you would still have relative certainty in your monthly housing costs.
“The biggest issue for this strategy is that many retirees have limited income, and the constant mortgage payments could put a big burden on their cash flow throughout retirement,” said Jamie Hopkins, co-director of the Center for Retirement Income at the American College of Financial Services in Bryn Mawr, Pennsylvania.
Whether you pay cash or take out a mortgage, you will still be responsible for homeowners insurance and property taxes. These generally increase over time, but tend to do so incrementally. Maintenance and repair costs tend to be sporadic and can vary from hundreds to thousands of dollars.
Buying a condo after retirement
“While the sale of your primary residence will likely result in more money for a down payment than may be needed for a condo purchase, we don’t often find the monthly expense savings to be that significant on an ongoing basis when factoring in condo association fees, the possibility of an assessment for capital improvements, and general operational expense inflation,” Carbray said in an interview.
On the upside, selling a home for a lesser-value condo creates the ability to invest the net proceeds for additional retirement needs, although there will be costs from selling and acquiring that reduce the amount available to invest. (Related: Retirement catch-up strategies)
“More often than not, it will result in long-term savings and improvement to monthly cash flow, but more often than not, the savings are not proportionate to the reduction in house size,” Carbray said.
Still, a condo with an association that provides services can be an attractive alternative to home ownership for those who no longer want to shovel snow, deal with expensive outdoor repairs such as driveway paving and roofing, or take out the trash, said Abby Eisenkraft, a tax advisor and preparer with Choice Tax Solutions in New York City. Certain communities have pools and other recreational elements that may not be available or may be cost prohibitive for retirees with a single-family home.
“Condos and communities that cater to retirees often have more services associated with them as opposed to a rented apartment, and certainly more than a house,” Eisenkraft said in an interview. In addition, communities for adults 55 years and older are popular because of the many services they provide and the friendships people can make with people their own age, which can help people avoid feelings of isolation after leaving the workforce.
Moving to a condo means losing some of the privacy of home ownership as well as open space, however. If you have active grandchildren, the loss of open space might be an important consideration, Carbray said.
Then there are the restrictions that come with how you can use and alter your property under homeowners’ association rules. There can be restrictions on everything from visitors to pets to paint colors.
Condos also have ongoing homeowners’ association fees and can levy special assessments to pay for expensive common area repairs to items like roofs and elevators.
Carbray said it is important to understand the financial state of the condo association and possible future capital expenditures to avoid walking into unexpected out-of-pocket costs.
Renting a house, condo, or apartment
From a pure financial perspective, renting can be a more affordable option for some retirees, Hopkins said in an interview. “However, even when it might be the most economic choice, retirees exhibit a strong desire to age in place and own their home.” (Related: Why renting could be a better choice for retirees)
Renting rather than buying, regardless of housing type, allows you to invest the money from your home sale to create an additional income stream, assuming you have the discipline to use the proceeds wisely. Renting can also mean significant savings on maintenance and repairs. In 2020, maintenance spending among homeowners who completed home maintenance projects was $3,192, a $2087 increase from 2019, according to Homeadvisor.
The biggest advantage to renting a single-family home is that you will retain the greater privacy and peace and quiet that come with this type of residence compared with a multifamily property. The biggest drawbacks include social isolation and accessibility issues related to the physical disabilities that often accompany aging. Similarly, renting a condo allows you to experience its upsides without the financial obligations associated with owning one.
Renting in retirement could also be a good choice if you are moving to be near a relative who might end up moving themselves. For example, the daughter who has agreed to care for you as you age might have to move if she changes jobs or if her current employer transfers her to a different location.
Apartments can be the least expensive rental option of all, in part because they are often smaller than condos and houses. But you will often give up peace and quiet and privacy when you rent an apartment or condo.
And when you rent, there are no guarantees, Eisenkraft said. “What if the landlord wants the property for a family member when your lease is up? You can be forced to move. Frequent moves can be expensive.”
Even when staying put is an option, you will need to budget for rent hikes. Average rent hikes can range from 3 percent to 5 percent, but can differ dramatically depending on the region, according to personal finance website Motley Fool. It is a good idea to see how much rents have increased over the past year or two in the area you are considering to gauge what might happen in the near future.
One way to combat rental uncertainty is by negotiating a long-term lease — say, three years, as opposed to the typical year-long lease — with the landlord that includes an option for a long-term renewal at a predetermined rate of increase. You might offer to pay slightly above market rate now in exchange for locking that rate in. You may not find a landlord who will be amenable to these terms, but if you do, consult an attorney to make sure your agreement is airtight. Living in a rent-controlled locale is another way to create stability in your ongoing housing costs.
The decision to move in and of itself is a very tough one for retirees, Hopkins said. “Most do not want to move and want to live in the same home for as long as possible.”
For those who do choose to move and downsize, what type of housing to live in and whether to own or rent are big decisions that affect your nest egg, your cash flow, and how much you enjoy where you live.
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This article was first published in December 2016. It has been updated.