Renting during retirement - a no brainer?

Peter_F

Rather than rent a property in retirement, perhaps a less risky option would be to keep ownership of the house but raise capital from it via a interest only mortgage. Whilst these are not available to everyone; those who qualify will have much greater flexibility over how to finance their retirement. Whilst you will have to pay interest on the funds borrowed it allows you to spend some of the capital as income for a number of years (whilst you are young enough to be active and go travelling etc). The remaining debt can then be cleared by downsizing later on in life or replaced with equity release funds. Too many people in retirement have modest incomes and massive home equity probably having overpaid their mortgage during their working life. Why not free up some of this money but retain ownership of the property and thus benefit from future house price increases.

TheTelltaleChart

michaels said:

Shimrod said:

michaels said:

Here is my take

Sell house pocket £1m

Assume an SWR on £1m invested 70:30 over a 40 year retirement in the UK of 3% then you have 30k a year gross to spend. 30k x 40 years is £1.2m so 200k growth taxed at 20% gives 29k net pa.

So the question is then would the 29k get more or less rental house than I get from my owned house.

Can't just look at rent though as owning incurs extra costs that renting does not.

I'm not sure I understand your calculation that sees a gross income of £30k giving £29k after tax. But assuming a house of £1m is likely to mean a higher pension/investment income, some or all of that £30k is likely to be taxed at 40% which reduces the rent money available.

Sorry. Logic is a 3% safe withdrawal rate means you spend 3% times 40 years equals £1.2m from what was a £1m pot initially. Of this 1m comes from the original pot so no tax and 200k is from growth that is taxed (ignoring inflation and tax on inflation).

On an annual basis that is 30k of which 25k is spending from capital so not taxed and 5k from interest taxed at 20% gives a total tax bill of 1k and a net of 29k.

That's not how tax works, is it? £1m in a 70:30 portfolio will generate at least £20k income in year 1, all of which is taxable.

And you can't ignore tax on inflation, either. If just the 70% in equities is growing by 3% in an average year, that's at least £20k capital gains per year. In year 1, you could postpone paying CGT by only realizing gains up to the £3k allowance. But after decades, if you need to sell down any capital (precisely what you're planning to do), then a large proportion of those sales will be taxable gains.

There is a reason why most people with a bit of wealth try to get as much of it as possible into tax shelters (i.e. your main home, pensions & ISAs). Taking a large chunk of capital out of any of those shelters voluntarily usually has a significant tax cost.

And this is ignoring the bigger issue that you're giving up a secure home in exchange for a SWR that (say) promises higher income after housing costs in an average outcome, with only a 1% chance that you'll end up unable to pay the rent. And in the 99% successful outcomes, you can still be forced to move home when you don't want to and you're very old. Why would you do this, if you want a secure home, and you start out by having one? As I said before, if you actually want an itinerant lifestyle, it's a different matter. But that's the key question, not crunching the numbers.