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Can Renting Instead of Buying Make It Easier to Save for Retirement?


Can Renting Instead of Buying Make It Easier to Save for Retirement?

A new study from HelloWallet, a firm that assists employers who want to provide online financial planning services to their staff, is the lightening rod for a fiery debate – are you better off saving for retirement than buying a home?

According to HelloWallet’s research, some 40 million households would do well to just say no to homeownership. Why? The report found that people in those households would have built more wealth by renting and investing their money in retirement vehicles like 401(k) s, IRAs or other tax-advantaged accounts.

Why renting can make sense

Furthermore, the study found that the benefits of homeownership can be hyped, especially when it comes to the tax benefits of buying a home, worse still if you’re in a lower income bracket, the tax benefits can be a mere pittance.

"Saving for retirement, rather than buying a home, is a better investment for a majority of people," says Todd Kading, managing director of LeafHouse Financial Advisors.

He says retirement investments are tax advantaged, thus the same investment amount that an individual could invest in a house could prove more lucrative if it were invested in a 401(k) or IRA, for example.

Secondly, he points out that retirement accounts are more liquid than are houses. "You could feasibly withdraw some or all of your retirement savings income if you wanted, whereas the assets invested into a home are not nearly as liquid."

A house is a lifestyle, not an investment choice.

Kading also likes the fact that retirement savings allow for diversity. Depending on your home to fund your retirement can be a huge mistake. Says Kading, "A house is a lifestyle, not an investment choice."

Renting also allows flexibility. "This is something that is especially impactful in an economic climate where relocating for a job may be helpful or necessary," says Elle Kaplan, CEO and founding partner of Lexion Capital Management.

Before you give up on the American Dream…

You’ll hear strong arguments too, that the study is flawed. "Renting is no silver bullet," says Joseph Ritter, Jr., a certified financial planner with Zacchaeus Financial Counseling.

For sure, "The results don’t mean people should stop buying houses," cautions Kimberly Goodwin, PhD., associate professor, Parham Bridges Chair of Real Estate and the University of Southern Mississippi.

She says that most cities in the U.S. don’t have a supply of rental property which could support such a change. Additionally, a sudden shift in people moving away from buying and toward renting would change the relative price of each option. If people decide to become renters, that is going to cause the cost of renting to increase relative to the cost of buying, then there would no longer be a cost savings from renting, she says.

For many large families, the rental market is not always an affordable option, adds Ritter.

For many large families, the rental market is not always an affordable option

Stacy Covitz says that when she bought her house in Carmel, Indiana, where renting was high in comparison to a mortgage, "We saved about $400 a month and put the extra toward our retirement."

Critics are quick to point out, "The study makes a big assumption -- that people would actually invest the money that they would have been putting toward a home into a retirement account instead. I’m not sure if this strategy would actually work in practice," says Katie Brewer, a certified financial planner with Your Richest Life Planning. Success depends on discipline.

Furthermore, truth is, home buyers can eventually pay off their mortgage and will not have to pay rent or make mortgage payments during retirement. "Renters on the other hand will need to pay rent in perpetuity over the life time," says Matt Rinkey, president of Illumination Wealth Management. A renter with a $1,000 a month rent payment for the rest of their life will need to accumulate $300,000 to $360,000 of additional assets just to support their rental payments during their retirement, says Rinkey. A homeowner with a mortgage paid off has significant financial security in not having that large expense as part of their monthly budget.

The bottom line?

The key if you choose to buy a home is to buy a house that is affordable. Then ideally, you can have your house and have breathing room in your budget to save for retirement too.

As with most financial decisions, says Rachele Bouchand, director of financial planning at Clark Nuber, "It’s best to step back and take a look at your entire financial picture and coordinate your savings between all your goals. The question shouldn’t be is renting better than buying a house, but what is the right answer for your lifestyle and goals? Renting is not necessarily the ‘right’ or ‘wrong’ answer to success in retirement, but it’s just one factor to balance with your other financial choices."

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Comments
Anonymous
Anonymous   |     |   Comment #1
There is no simple answer to this since there are so many variables involved. Talk to those people that bought homes at the peak of the last housing bubble that are still underwater or lost their homes. Also talk to those that are now paying exorbitant rents, that keep on going up, in booming areas of the country. Wrong timing regarding a home buying versus renting decision can result in a financial headache down the road. 
Anonymous
Anonymous   |     |   Comment #2
There isn't a right or wrong answer.  It "Depends"!
rjcohen
rjcohen   |     |   Comment #3
As the article and the first comments suggest, *it depends*, and for many the answer is to *do both*.  However, there are some behavioral factors yet to be mentioned that lead people toward home ownership even when it is less financially desirable than more retirement savings.

1.  Virtually no one separates the investment and consumption returns to home ownership to truly understand the payoffs.  It can be done, with a lot of diligence, by excluding the rental-equivalent costs, including utilities, at market rates; all the rest of the cash flows are investment results, and you need to do an IRR calculation to gauge performance.

2.  Home ownership is visible, and socially acceptable to show off to your friends and family, unlike 401k/IRA statements.  Likewise, much *pride of ownership* spending, which doesn't accrue to the value of the home, is additional consumption that you wouldn't indulge in as a renter.

3.  Many people feel more comfortable with *stable* assets they can see, touch, use and *control* than with big account balances, with daily fluctuations and cyclical booms and busts, that only appear on a screen or an occasional paper statement.  Mutual funds are pretty abstract concepts.

Owning a home, paying off the mortgage, and living off a pension and Social Security was pretty simple.  Renting, creating your own pension by managing defined contribution plans, and worrying about Social Security is pretty unnerving.
Anonymous
Anonymous   |     |   Comment #4
I think that the article is correct that one choice is not for all. But one thing to remember that whether renting with all of its expenses or purchasing a home with all of its expenses, neither should not be over one weeks pay. If it is you can't afford it. 
We only rented the first year we were married. Then purchased our first home close to where we worked  so that we could walk to work or ride a bicycle. As the children came we purchased a bigger home in the country with a great school system. When we retired we purchased a new home in an area close to shopping, doctors and hospitals and with a great school system. Utilities are now so much cheaper than our old home even though it is not much smaller, only on one floor with a basement. We do have much higher property taxes being close to town and we just voted in new school taxes which make our taxes about $5,500 a year. But even with utilities and taxes and lawn care it is cheaper that renting. I love to have the space to have the whole family here during the holidays for dinner.  We can have up to 52 people. We do eat in the finished basement where we have room to set up several tables end to end or put  the tables in a couple of big squares. (2-26 lb. turkeys and 15 lbs of boneless ham)
 I love having the room to have the grandchildren over for a sleepover. Sometimes we sleep on blow up beds in the basement, eat popcorn while watching scary movies or just play games, or just catch up with stuff. We are in our mid 70's good health and hope to keep this up for at least 10 years like my parents did.  
In our town we also have subsidized housing for seniors that will cost you no more than 30% of your income. They have many activities at these complexes. I take some classes at our local college with many of the people from several of these complexes and they love to live there. Also am taking a Tai Chi class at a local church with many of the people who live in the complexes. 
I believe it is a personal preference and your health that help decides where and what you decide to do. When we can no longer physically wash windows, do lawn care, shovel snow,  I think a senior complex might be the answer for us or maybe we will have someone live with us. There are college students in town that will do lawn care, shovel, and fix meals etc  for room and board.
Some of the senior complexes in our town are high rise apartment buildings, some are like little houses, some are complexes all on one story with a shared recreation room, grass, flowers, gardens etc that residents care for and they also have paved walking trails.  
As far as under what housing conditions you purchased a home, it doesn't matter. It is not an investment. It is a place to live. A home should never be considered an investment. Rent prices change but once you purchased your home it is done. It doesn't matter what  you paid for your home and the condition of the housing market when purchasing a home unless you are not planning to stay there long and have to sell and then you should not have purchased the house in the first place. You are purchasing a home because it suits your needs and your budget. It never should be considered an investment. It is like buying a car whether it is new or used, once you drive it away it is worth less, as are appliances, furniture, clothes etc. It is what you need and it is not an investment. 
With utilities, taxes, insurance  we are budgeting  $650 a month and have money left over.  I am quite content with that. I believe in our area and circumstances it is cheap living. I love the space, the view of the trees, deer, turkey etc. Shopping is 6 miles from our home. All the stores that we use are within 1 mile of one another. We have grass, trees, flowers, and walking trails and sledding hills for the grandkids. It was a perfect solution for us.  Doctors and hospital are within 8 miles and clinics within 2 miles. We also have a medical school here. For now and for our 70 plus years with family, friends and health, life is good, when conditions change then we will deal with it when the time comes. Can never expect things to stay the same at this stage of our lives. In fact things change at every stage of our lives and we prepare the best we can. 
Anonymous
Anonymous   |     |   Comment #5
#4....I don't plan on moving soon with the same house for 40+ years and prop 13 property tax "benefit" it would be really hard to move. BUT, would appreciate knowing the area/state/city for this "paradise" you describe? Thanks!
Anonymous
Anonymous   |     |   Comment #6
For me, the quality of life as a homeowner FAR outweighs any financial gains I MIGHT have realized as a renter.

If every decision in life were purely financial, then no one would ever take a vacation or have children.

P.S. the home I bought in 1997 would now sell for about 3.5x what I paid for it. :-)
Anonymous
Anonymous   |     |   Comment #8
We built our own home in 1973 living in the walkout basement as we were doing the work on it. 
Anonymous
Anonymous   |     |   Comment #7
We had a deal with property taxes also but the move and its advantages were more important. Our taxes were 20% of what we pay now. Michigan
Anonymous
Anonymous   |     |   Comment #14
This is #5. Thanks for info. Another aspect is several community prop states under IRS code allows a stepped up basis at the time of death of first spouse to die. Thus at a certain point one "can't" sell when this coupled with low prop taxes. And then cash out for no taxes being due
Anonymous
Anonymous   |     |   Comment #9
I rented for a while just starting out/  Then I bought a home which I owned for 20 years.  Finally, I grew tired of being tied down to the same place; tired of having to deal with repairs, plumbers, etc.; tired of mowing the yard; tired of property taxes and homeowner's insurance and on and on.  I have found a nice little rental house in a medium size city within and hour of a major city and absolutely love it.  When something goes wrong, I call the landlord and sit back and let him deal with whatever it is.  I wish I had never bought a house in the first place but it is what it is.  I will stay here until I feel the wanderlust kick in again and off I go.  Heaven.
Anonymous
Anonymous   |     |   Comment #12
Why didn't you do a reverse mortgage and live free for the rest of your life. If you had some equity, you could have taken that out as well and be worry free of renting or owning.
Anonymous
Anonymous   |     |   Comment #23
I know this is blasphemy considering the site we are posting on but money was not the #1 consideration.  I want to be free to pick up and go whenever I want.   Being tied down to one place is not my cup of tea.  Life is too short to spend it all living in one place the whole time.  Just too boring for me.  I am a retired teacher and the longest I ever stayed at one school was 8 years and that was about 2 years too long.  The idea of staying in one job for 30 years had ZERO appeal to me.  The same for where I live.  Not one single regret other than wishing I had never bought a house in the first place.
Anonymous
Anonymous   |     |   Comment #10
I just read an article on this topic...a home is a lousy investment. The comparison made was: a $350,000 home versus $1400/month rent over 30 years. When I stopped laughing I realized, once again, how many silly people are writing on the net. If you own a home and you're not saving/investing for the future you probably have more home than you can afford. Or, too many leased cars. Or, too many toys. Or, you just don't care.
Anonymous
Anonymous   |     |   Comment #11
I think Todd Kading is a either investor in rental properties or he owns several of them on a large scale. Renting will never equal owning, studies are made to promote their own interest. Just think logically, who would pay for such study and the answer is to obvious to even think about it.
Claire T.
Claire T. (anonymous)   |     |   Comment #13
We are senior citizens who sold our longtime house in 2005 and wanted to try renting.  We had read all the articles about renting vs. buying, the economic benefits of renting, etc.  Our first rental was a very nice 3 BR apt. in a upscale complex.  Problem?  Noisy neighbors amd ineffective maintenance staff.  Yes, we had no maintenance responsibilities, but we also had no control over the quality or attentiveness of the maintenance.  And as mentioned, neighbors would change over the three years we were there, some good, some not so good.  Of course, we had no control over that either.  Then at the advice of our accountant and others, we rented a nice tidy single family house in our community.  It was great -- most of the benefits of homeownership, but none of the responsibilities.  No equity, no repairs, landlord was great.  Problem?  After  3 1/2 years, the owner had to sell the house as he was moving out of state.  A huge disaster for us!  We had to pack up and move AGAIN, at considerable effort and expense.  Plus we had realtors disturbing us for the last 3 months as they began to market the house.  Not what we wished for in our retirement.  That cured us of renting -- we then bought a nice little low-maintenance house nearby.  We now have security from the many disadvantages (as we see them) of being a tenant.  We have a basement and a garage, a private washer dryer of course and peace and quiet.  We are too old to pack up and move at the whim of a landlord, or if in a complex, to deal with the issues there.  We now hire contractors to mow the lawn, shovel the snow, etc. and it still is cheaper than renting.  We hope to own our own home and never rent again.  Just our experience.
RJM
RJM   |     |   Comment #15
I rented for FAR too long. But I didn't want to buy in the area I lived and worked in. And living farther out would have been a LOT more driving.




I waited so long that I just paid cash when I did buy. Of course, being self employed and being behind on my taxes much of the time meant I couldn't get a good rate or low fees.

And I think since I did buy about 11 years ago, the value of my house has declined a good deal. Partly because of the market and partly because my lack of spending on repairs & maintenance.

But, I love that its paid for.

And another thing, while I took big risks in the market when I was younger and got very good returns, now that Im retired (early) I find myself way too risk-averse.

I think most people should buy unless they plan on moving within a few years.
Ronald Rickerds
Ronald Rickerds   |     |   Comment #16
Owning your own home allows "you" to do repairs when "you" want at a cost that "you" can afford and when "you" can afford them. ... with or without insurance that "you" design......
Owning your own home allows "you" to own the only keys to "your" home...
Owning your own home allows "you" to be neighborly or not...
Owning your own home allows "you" to go on vacations for any time without payments
Anonymous
Anonymous   |     |   Comment #17
One point that is missing from home ownership is upkeep cost (which may have already been mentioned in previous comments).  One roof replacement costing, for ease of computing numbers, $12,000 would add an effective rent cost of $1,000 per month for one year to home ownership (or $100 per month over 10 years).  This is just one instance of a near infinite number of upkeep / ongoing maintenance costs that renting doesn't involve.  Insurance, taxes, and other expenses also have to be included in the "monthly" cost of home ownership which don't apply to renting (some places require renter's insurance, but this is much cheaper than home owner insurance).  The argument can be made that some of these costs are recovered with the increasing value of a home (although not many can say this since 2008).  If one is single, renting is almost the only way to go (of course, there are exceptions).  The picture changes when married or having a family with children.  Keep in mind my evaluation is from a purely financial perspective.  There are non-financial headaches that can be involved with renting such as bad neighbors, etc.
RJM
RJM   |     |   Comment #18
Im single and owning still makes sense.
My roof has lasted 11 years and the house was 9 years old when I bought it.
I could replace for $7000-8000 max and even amortizing over 15 years its just $42 a month.
Property taxes are low where i live. And loud neighbors when renting was a huge issue for me. (Its SO much quieter in a house)
I also value parking in my garage a lot more than I would have thought. Thats something you generally cannot get when renting. My county went bankrupt because of corruption. So my sewer & water bill has tripled since I bought 11 years ago. All in all its a no brainer for me. Of course, I paid cash & go without homeowners insurance.  
Replacing my fridge is another big cost that I didnt expect after just 11 years.
My current one cost me about $750 11 years ago and its on its last leg as the compressor has gotten very loud. Although its still cooling for now.
My next one will be a little smaller and I wont get an icemaker or water in the door.
(I used them a little at first, now almost never)
Anonymous
Anonymous   |     |   Comment #19
Think twice about no fire, etc insurance. And with 100% equity ins protects you not the lender
RJM
RJM   |     |   Comment #20
Well, I can take the risk. My house is not 10% of my net worth. Ive already saved at least $6000 by not having it the last 11 years.

Funny thing is after I bought, I called around & was going to buy with the best rate I could find, with Alfa back then. But when I called to sign up, they attempted to UPCHARGE me about 50% for the first year because I didnt have renters insurance. Which, for someone with assets & not much in the way of furnishings, it didnt make sense to have it.
The risk of a fire or tornado is very small, One that I am willing to accept in exchange for the savings.
Although a few years ago, we had dozens of houses get hit not a half mile from me.
I was fine, except a few years prior to that a tree blew down and knocked down my back fence. But that would have been out of pocket even if I had insurance.
Anonymous
Anonymous   |     |   Comment #21
Right, high deductibles keep the premium "lower."  I like the ratio of value/net worth.
Anonymous
Anonymous   |     |   Comment #22
RIM, I can kind of understand why you choose not to take out insurance.  It is risky, but that's some pretty nice savings, especially considering how much premiums can jump at a moment's notice.  Do you live in an area where property tax increases are capped per year (example is CA) or have you noticed them going up significantly in the last few years?  I own in one state and rent in another about 400 miles away where I work so I have experience in both owning an renting.  The property tax increases have been ridiculous the last 5 years or so for me.
Herb
Herb (anonymous)   |     |   Comment #24
RJM,
I am retired since 2000 from a major national homeowners ins. carrier.  I would recommend you reconsider having homeowners insurance.  One of the policy benefits (with most policies) is what they call "ALE" which is Additional Living Expense.  If you can't live in your home due to a covered loss, the company will pay for you to either be in a hotel, or rent a comparable house while repairs are  being made.  This is a HUGE benefit to having insurance vs not.  Meals, dry cleaning, etc. are also typically covered with this policy feature.  Even "moderate" damage to a home can make it unlivable for a couple months until contractors can be found, begin work, make the house livable, etc.  The homeowners policy would cover the living expenses I mentioned.
Of course, most homeowners policies also cover belongings, clothes, furniture, etc., sometimes at "replacement cost" which is a big advantage to having insurance.  I'd reconsider it, just my two cents.  These policies cover a lot more than repairs to the house.
Anonymous
Anonymous   |     |   Comment #25
Need to consider non-renewal provisions and impact of making claims! Some policies guarantee renewal AND some states regulate premiems, eg calif
RJM
RJM   |     |   Comment #26
I fully understand I will not be "covered" for things like a hotel in the event my house was unlivable.
But the chances of my house being unlivable are so remote that its just not a good wager to pay the $400-600 per year. (Or more, I havent priced it in 11 years)
I live in a low property tax state. My property tax is $303 a year and it hasnt gone up in several years. I have mandatory fire dues of $218 and they jacked it up about 15% this year.
I think my valuation for property tax reasons is about $74k but I peg an actual value of about $60k on my house. When I was shopping for insurance, nobody would even offer me anything other than full replacement even though it was double what my house was worth. So Id be paying for twice the coverage that I really want or need.
Theres a 99%+ likelyhood that I am never displaced by a tornado or fire. I can risk it + hotel bills if I am.
I took a much bigger hit from the stock market in 2009. And in recent weeks, Ive taken a pretty big hit on just a few oil/gas related stocks that I own.
Risk is part of life. 


 
Anonymous
Anonymous   |     |   Comment #27
If anyone wants to cover the premises (not land part) for twice the current "replacement value," file a complaint with ins commissioner...no one should be over insured and it is prohibited in most states. Remember if not at replacement you only receive depreciated value.
RJM
RJM   |     |   Comment #28
They told me thats all they sell. I couldnt opt for anything less. Replacement was 150% of value.
Saul
Saul (anonymous)   |     |   Comment #29
#27 is correct.  It is illegal in most states to require overinsurance for a home.  Plus, of course, the co. will only pay to replace based on what's there, they will not "upgrade."  So you would never collect on excessive coverage.  I'd shop around.  The belongings are another issue and expensive to replace.
RJM
RJM   |     |   Comment #30
Well, after 11 years without it, Im not shopping around now.
Besides, I just lost about what a roof being torn off would cost today in the market.  No insurance on that either.
LOL