Renting during retirement - a no brainer?

Pat38493

Just for fun I was messing around wondering what would happen if instead of buying a new downsized house when we sell up shortly, what would happen if we just kept the money and rented throughout retirement.

I plugged in a few numbers to historical modelling, and it seems like renting works out slightly better with a 99% chance of making it through retirement without running out of money in my case, versus 97% with buying a new house instead (in the worst case scenario).

But of course, at the end of life I have no house to pass on in that worst case scenario (although I have factored in substantial gifts to children in 1st 10 years in both scenarios).

Crazy?  However if I look at the median scenario, I would have £11m at the end of life in real terms, which is a heck of a lot more than the new house would be worth (versus £2m in the scenario where I downsize to a smaller owned home).

On the face of it, this challenges the notion that you should always own your property!

Voyager2002

Have you allowed for inflation, which would increase your rent by far more than the costs associated with living in a house that you own?

pterri

…and the landlord deciding to sell etc. for me a pension is about having enough money to do what I want to do within reason and SECURITY, the second is perhaps more important? 

400ixl

Not sure I would want to be dependent on someone else maintaining the condition of my retirement house, or where they can evict me.

Maybe equity release may do the same outcome for you?

SouthCoastBoy

For me I would like the security of my own home and not be at the mercy of landlords.

Pat38493

Voyager2002 said:

Have you allowed for inflation, which would increase your rent by far more than the costs associated with living in a house that you own?

Yes - the rent is automatically adjusted for inflation using historical scenario stress testing (although I think it uses general inflation rather than specific rental rate inflation).

pterri said:

…and the landlord deciding to sell etc. for me a pension is about having enough money to do what I want to do within reason and SECURITY, the second is perhaps more important? 

In reality this wouldn't be a long term thing - highly likely we would end up buying a house again at some point.  There are also advantages to this if you retire early in your 50s - you can move between rentals for a decade to live in different places, then buy a property when you want to settle down.

It's more a thought experiement based on the fact that we have sold our house, and have not found one to move to yet - it gives me some reassurance that we could live in rentals for a year or 3 until the right house comes along.

Let's say I retire now (wife already retired).  I am 56.  I spend 10 years renting out places in different parts of the country.  30th percentile (lower likely) scenario says I have £1.25m at age 67, versus £485k if I buy a 600K house this year.

i.e. - it's highly likely that after touring around paying rent for 10 years, I would have enough to buy the house I was going to buy anyway.

(figures are in real terms, adjusted for historical inflation in the same way that SWR stress testing is done).

Further, I don't have to feel any pressure to find my dream home this year.

To be clear, this only works if you have an expensive house to sell at the start of retirement so you have the best part of a million pounds extra to invest at the start.

kempiejon

Depending on how much one can sell the house for I think the numbers could stack up, clearly the investment income from a £300k house is different to that from a £1M house.
If retired with sufficient pension provision and living within one's means putting the capital in the house to work could easily match inflation, fund an annual rent bill and potentially offer much more. Then one can exploit the personal and lifestyle advantages of no property costs, freedom to change location easily and often.
Disadvantages would be loss of an inheritace allowance, the discomfort some people feel about not owning where they live, you can't really make a place your own with decorations and changes, there being a third party into your living arrangements for maintenance etc
Being able to shrug off all that committment up sticks and wander through life for a few years sounds like it has options not open to most people.

Stubod

...sounds like a terrible idea to me?? .....could get into your later years, have health / mobility issues and the Landlord then decides he wants you out and you have to start looking for another property??

hugheskevi

What are the assumptions about the net return on the capital from the house sale? In particular, the rate of return net of charges, dividend tax, capital gains tax, income tax, etc, depending on how it is saved/invested.

SarahB16

For people considering the high end retirement village properties then renting may be a better alternative due to the atrocious value the homes are subsequently sold for (and I'm not referring to deductions for event fees).  There is very little demand for the subsequent/second hand sale of these retirement homes.  

I can't recall their name but there are now some companies that provide retirement village apartments which are for rent instead of buying but of course you would need to factor in the service charges, etc too.  

Bearing in mind when you see those pearly gates (not of the retirement village but up in the sky) there is likely going to be an event fee to pay so whoever you have left your home to won't receive its full value anyway and they will also be left with the very difficult task of trying to sell it whilst still incurring the ongoing service charges.  

Say, for example, you have an elderly mother or father whose home is no longer suitable for them then renting one of these retirement apartments may possibly be a good idea because they can see what they think of the place rather than the commitment of purchasing a retirement village apartment.  

Pat38493

hugheskevi said:

What are the assumptions about the net return on the capital from the house sale? In particular, the rate of return net of charges, dividend tax, capital gains tax, income tax, etc, depending on how it is saved/invested.

I modelled it using Timeilne software with investing the entire amounts, plus all my pensions and other money, in 100% global equities for the duration of retirement.  CGT and other taxes are calculated by the software.  The software tests the real results of retiring any month since about 1916 or so, modelling real returns and inflation.  I programmed a bed and ISA for the money outside of tax wrappers but frankly this made very little difference to the overall result.  There is also 2 x DB incomes and 2 state pensions in the mix.

For the base case where I buy a new house immediately, my pensions, investments, and the net proceeds of the house downsize are invested roughly 70/30 equities / bonds&cash based on the starting point of a calculated cash flow ladder.