Letter: Is owning your own home really important in retirement?

What are the pros and cons of selling our paid off family home, investing the $$$ and renting?

Hi Bec,

Thanks for your work! All the best retirement advice says you must own your own home. We want to sell our huge family house (mortgage fully paid off). We do not want to live in a house again and want the ease and ‘lock up and leave’ lifestyle of apartment living. However we do not want to buy an apartment as we don’t want to get involved in a strata title. In fact, during these discussions we have realised we don’t want the responsibility of owning at all and would love to just rent an apartment.

So our question is, what are the pros and cons of investing the $$$ and renting?

Thanks Lisa

Wow! Lisa! That’s a big can of worms. I’ll do my best in a short answer but on this, I URGE YOU to get advice. Your situation can differ wildly depending on YOUR assets and income sources.

As you can read in my book, and in other things I write, I see owning your own home outright as you head into retirement as a fundamental pillar that supports financial confidence and financial certainty. And I know not everyone has the benefit of owning outright, but that’s a different conversation. Here’s why I think it’s important: 

It makes your housing costs predictable: Owning a home (with a paid-off mortgage) eliminates the risk of rent increases and provides a predictable housing cost in retirement. This can be particularly important for those on a fixed income - which, let’s face it, is most people

Housing investments can still appreciate: Historically, property values have appreciated over time, potentially increasing your net worth and providing a source of equity for emergencies or additional income.

There’s psychological security in owning your own home: For many, homeownership provides a sense of stability, security, and control over their living environment. This can be particularly valuable in later years.

You get to leverage the systems of retirement in Australia: Your principal place of residence is exempt from the assets test for the age pension in Australia. So, if you will be eligible to receive an age pension at any point and will be leaning on the assets test to do so, this is an important consideration as you can own a palace in Byron bay and potentially still get the age pension. If your income in retirement is what throws you out - it’s a totally different discussion.  

You have a protected asset for future financial needs: And, if you need access to capital later in life, it can be an important tool, allowing you to downsize OR sell it to fund an aged care bond.

Now, my opinion is not necessarily right for everyone. You really need to think about your own situation and get advice. 

It’s also important to point out that just because I think housing is an important pillar of financial certainty in older age, I am also very aware that this is not as straightforward a discussion as it once was. There's no denying that homeownership can offer some financial benefits, but it's not the only path to security. In fact, for some retirees, renting and investing, or renting, with a guaranteed income stream like a defined benefit pension or annuity can be an advantageous option. 

Here’s the other side of the argument:

• By selling a ‘HUGE’ house, you should unlock a significant amount of capital. Investing this wisely can generate passive income and potentially grow your wealth over time. Renting frees you from the financial burdens of rates, building insurance, and unexpected maintenance costs.

• Renting gives you the flexibility to easily change your living situation. You can move closer to family, downsize if your needs change, or even try out different locations without being tied to a property. 

• Say goodbye to mowing lawns, fixing leaky roofs, and dealing with strata concerns. Renting allows you to enjoy a low-maintenance lifestyle, freeing up your time for travel, hobbies, and relaxation. 

• Investing your capital allows you to spread your risk across different asset classes. This may, if invested well, lead to higher returns and greater financial security compared to having all your wealth tied up in one property.

But there’s also a hefty list of cons… 

• You won't build equity in a property or have a tangible asset to pass on. For some, the emotional and psychological benefits of homeownership are important.

• While you'll avoid unexpected maintenance costs, rent can increase over time, potentially impacting your budget. It's important to factor this into your long-term financial planning.

• As a renter, you're subject to the landlord's rules and regulations. You may have less control over renovations, modifications, or even pet ownership.

• Investments come with inherent risks. Market fluctuations can affect the value of your portfolio and your overall financial security. So, if you go down this path, please seek professional financial advice to develop a sound investment strategy.

Obviously, this discussion is tricky.

There’s one other type of housing people who want the benefits of renting but the long term stability of ownership might consider - and that’s land lease otherwise known as lifestyle communities. This type of living is particularly interesting to those who can access rent assistance which happens if you are eligible for the age pension - but many people who live in them do so without rent assistance, 

Land lease and lifestyle communities offer an alternative option for retirees seeking a low-maintenance, community-oriented lifestyle without the burdens of traditional homeownership. You own the dwelling but lease the land, which can result in lower upfront costs and ongoing fees compared to buying a house or apartment outright. These communities often provide amenities like swimming pools, clubhouses, and organised activities, fostering social connections and a sense of belonging.

But, just like in all other property moves, and perhaps more so here, it's important to understand the terms of the lease agreement, potential annual compounding fee increases, and any restrictions on selling or bequeathing the property.

That WAS a big can of worms - hope I did it justice. Make it epic Lisa and please, get some advice.