For many people, owning a mortgage-free home in retirement can be a financially smart decision, as it allows them to keep their expenses low by only having to worry about property taxes, maintenance, utilities, and insurance. However, if your home is particularly valuable or no longer fits your needs in retirement, it may be worth considering cashing in on your housing market luck and using the investment returns to rent a place that better suits your retirement plans. Whether or not this is the right decision for you will depend on a variety of factors, including the amount you could get for selling your home, the housing expenses you would be freeing yourself of, the amount you would spend on rent, and your comfort level with managing an investment portfolio.
Is selling your home and renting in retirement the key to maximizing your financial security? We explore the pros and cons to help you decide.
To help you determine whether selling your home and renting in retirement is a good idea, it may be helpful to go through an example and consider all of the different pieces. For instance, let’s say you could get $1 million for your mortgage-free home after deducting realtor fees. A basic rule of thumb for a typical 30-year retirement is that you can confidently spend 4% of your starting portfolio balance each year, with a small increase for inflation. Using the 4% rule, $1 million would give you $40,000 per year before taxes.
In this example, the $1 million portfolio would provide an after-tax income of roughly $35,000 per year (adjusted for inflation) throughout a typical 30-year retirement. This is based on an average tax rate of 13.5% for someone living in Ontario with taxable income of around $50,000 per year and a globally diversified “balanced” investment portfolio (60% stocks and 40% bonds). It’s worth noting that the tax rate in this scenario is partly low because the starting amount from the sale of the property is entirely tax-free, and it would be even lower if you have room in your registered accounts like a TFSA or RRSP. In total, this income of roughly $2,900 per month could be used for rent.
In addition to generating income from the sale of your home, you would also eliminate some housing expenses. Property taxes and maintenance, for example, could each be 1% of the property value per year, totalling $20,000. Utilities could cost around $3,600 per year, and home insurance could be $600 per year. In total, these expenses add up to around $24,200 per year, or $2,000 per month.
Taking into account both the increase in income and the decrease in expenses, selling your home and renting in retirement could result in a $4,900 per month swing in your finances, which could be enough to rent a nice apartment. It’s important to note, however, that this is just an example and you should run the numbers for your own situation or consult with a financial planner to get a more accurate idea of whether this option is right for you.
In conclusion, deciding whether or not to sell your home and rent in retirement is a complex decision that will depend on a variety of factors, including the amount you could get for selling your home, the housing expenses you would be freeing yourself of, the amount you would spend on rent, and your comfort level with managing an investment portfolio. While selling your home and renting may be a financially smart decision for some people, it’s important to carefully consider all of the potential pros and cons and run the numbers for your own situation before making a decision. Additionally, it may be helpful to seek the guidance of a financial planner to help you weigh the various options and make the best choice for your financial future.