Renting vs Buying in Retirement
Retirement brings new freedoms — but it can also raise difficult financial decisions. For many retirees, deciding whether to rent or buy a home is a pivotal choice, particularly after a significant life event like the loss of a partner or downsizing the family home.
Let’s explore this through a fictional example: Anne, a 69-year-old retiree weighing her housing options. Her story highlights the broader considerations — emotional, practical, and financial — that many Australians face in retirement.
1. Renting: Flexibility, but at a Cost
After selling her long-term family home, Anne had $900,000 in cash and was receiving the Age Pension. Rather than rushing into another purchase, she decided to rent initially.
Renting offered her time to adjust after a major life change. She didn’t have to worry about home maintenance and could remain flexible about where to live. This was especially helpful while she processed her grief and considered her long-term needs.
However, flexibility came with trade-offs. At $650 per week, her annual rent was around $33,800 — a substantial outlay without offsetting investment returns. With interest rates and term deposit returns relatively low, this posed a risk of gradually eroding her capital. Additionally, rental insecurity was a concern: leases end, landlords sell, and suitable properties for older renters aren’t always available in desirable locations.
Renting helped Anne transition into retirement, but she understood it may not be a sustainable option long term.
2. Buying: More Than Just a Place to Live
Anne also considered purchasing a modest unit for around $750,000. This would leave her with a buffer of approximately $150,000 for expenses and emergencies.
Why buying appealed:
Stability: Home ownership offers security. Anne wouldn’t face eviction or rent hikes and could modify her home to suit her needs as she aged.
Improved Pension Assessment: For homeowners, Centrelink applies a lower assets threshold when calculating Age Pension entitlements. By reducing assessable assets, Anne might receive a higher fortnightly pension.
No Ongoing Rent: With no rent or mortgage, her cost of living would drop significantly — offering better predictability as she aged.
Estate Considerations: Owning property could allow Anne to leave a valuable asset to her daughter, which was important to her.
That said, homeownership isn’t cost-free. There are ongoing expenses — council rates, strata fees, insurance, and maintenance — but these are often lower and more predictable than rental increases. Importantly, she would retain control over her living situation.
3. Retirement Villages and Lifestyle Communities: Appealing, but Complex
Anne explored several over-50s communities where she could purchase a right to reside for around $200,000 — preserving most of her capital for investment. These communities often promote social connection, safety, and low-maintenance living.
However, retirement villages and lifestyle resorts come with limitations:
Complex Contracts: Deferred management fees and exit charges can be significant — often up to 30–35% of the resale value.
Limited Control: She wouldn’t own the land, and rules around modifications, pets, and visitors vary.
Ongoing Fees: Monthly service fees (sometimes $600–$800) can add up quickly and aren’t always well understood by new residents.
While the lifestyle and lower buy-in price were attractive, Anne was uncomfortable with the lack of long-term ownership rights and the potential financial impacts when leaving the community.
This option may suit some retirees, but it’s critical to understand all legal and financial implications. Independent legal advice should be obtained before signing any contracts in such communities.
4. Renting and Investing the Proceeds: Risk vs Return
Anne also considered renting while investing her $900,000 — a “rent-and-invest” approach. The idea was that investment income could help cover her rent, keeping her capital relatively intact.
However, this strategy depends on:
Consistent Investment Returns: Returns need to outpace both rent and inflation.
Comfort with Market Risk: Anne had limited investment experience and was uncomfortable with share market volatility.
Longevity Risk: Without strong returns, she could deplete her savings — especially if she lived well into her 90s.
Retirees pursuing this approach should understand investment risk and ensure financial modelling accounts for long-term drawdowns. It’s not suited to everyone, particularly risk-averse individuals.
In Anne’s case, conservative investments (e.g. term deposits) wouldn’t produce sufficient income to offset her rental costs. This strategy didn’t align with her comfort level or objectives.
Key Considerations When Deciding
There’s no one-size-fits-all answer. When weighing rent versus buy, here are some questions to ask:
Do I prefer stability or flexibility?
Can I manage investment risk?
How important is leaving an inheritance?
Will homeownership give me peace of mind?
What are the implications for Age Pension entitlements?
In Anne’s case, buying a modest home best met her financial and emotional needs — offering security, predictability, and a tangible asset for the future.
Important Planning Notes
Housing decisions in retirement should never be made in isolation. Considerations include:
Age Pension: Owning a home may improve your pension entitlements due to the lower asset threshold for homeowners.
Cash Flow: Ensure you account for ongoing costs like insurance, rates, and maintenance — or rent increases if leasing.
Estate Planning: The structure of your home ownership may affect what you can leave to beneficiaries.
Engaging with a licensed financial adviser can help ensure your choices align with your long-term goals, cash flow needs, and Centrelink obligations. Advice should be tailored, and updated modelling is essential to reflect changing legislation, investment conditions, and personal circumstances.
Disclaimer
This article is for general information only and does not take into account your personal objectives, financial situation or needs. It is not financial advice. You should consider speaking to a licensed financial adviser before making any decisions regarding housing, investments, or retirement income planning.