Owning a home in retirement may seem like the best choice, but unforeseen expenses can quickly change that perception. From roof repairs to special assessments, burst pipes to broken air conditioners, and rising property taxes, the costs can add up. It’s moments like these that make renting not such a terrible option after all.
In a surprising new study conducted by money manager T. Rowe Price on retirement spending, two key findings emerged that challenge common assumptions.
Volatile Yearly Spending
The first discovery is that year-to-year spending in retirement is much more unpredictable than one might anticipate. The study revealed that within a two-year period, roughly a quarter of retirees experienced an increase in expenses of at least 17%. Over the entire span of their retirement, more than one in five retired households saw their expenses surge by at least 50%.
The study collected data from a representative sample of 1,306 households over a 14-year period from 2005 to 2019. The information was sourced from the University of Michigan’s renowned Health and Retirement Study, supplemented by the Consumption and Activities Mail Survey.
Home Expenses vs. Health Expenses
Surprisingly, the second finding of the study highlights that it is home expenses rather than health expenses that often drive these volatile spending patterns. While health-related costs are commonly assumed to be the primary culprits, it is actually necessary spending tied to homeownership that takes precedence.
T. Rowe Price found that for most households, these unexpected spikes in expenses were due to “nondiscretionary” spending – essential expenditures that couldn’t be avoided. Only retired households earning over $150,000 a year saw big spending increases attributed to discretionary choices.
While homeownership may still be a preferred option for some retirees, it’s crucial to recognize the potential financial fluctuations that come with it. Being prepared and maintaining accessible funds can help navigate these uncertainties and ensure a more stable retirement experience.
Retiring and the Cost of Homeownership
The Volatility of Home Expenses
One of the biggest causes of expense volatility for retirees is home-related or housing expenses. According to a study conducted by T. Rowe Price, these expenses accounted for a significant 25% of the overall expense variability among retired individuals. In contrast, health expenses only made up 5% of the volatility, while transportation expenses accounted for a mere 3%.
The Advantages and Risks of Homeownership
Both renting and owning a home come with their own set of advantages and risks. Homeownership allows individuals to build equity through leverage, as long as housing prices continue to rise. Additionally, owning a home provides protection against the risk of increasing rents.
However, it is important to note that the advantages of homeownership do not always outweigh the disadvantages. One major drawback is that housing is considered an illiquid asset, making it difficult to convert into cash when needed. As highlighted in the T. Rowe Price study, owning a home exposes individuals to the potential burden of significant costs and the hassle of dealing with various issues. On the other hand, when you rent, these responsibilities typically fall on the landlord. Renting also grants access to amenities such as gyms and pools that are not easily available to homeowners.
Furthermore, there are instances, particularly during housing bubbles, where renting actually proves to be more cost-effective than homeownership.
The Current State of U.S. Housing
The pandemic has significantly impacted housing prices in the United States. Nationwide, house prices have surged by 44% since February 2020, just before the pandemic hit. However, recent data from Realtor.com, which is owned by News Corp., indicates that prices are now falling.
Considering the worrisome state of U.S. housing affordability and the improved payout rates on lifetime annuities and inflation-protected Treasury bonds, retirees should carefully evaluate the option of selling their homes. By investing the proceeds into bonds or an annuity and choosing to rent, retirees can potentially alleviate financial burdens and free themselves from the worries of homeownership, such as dealing with plumbing issues.
In conclusion, retirees should take into account the significant impact that home expenses have on their overall financial stability. Exploring alternatives such as renting after selling a home can provide financial relief, especially during times of housing market volatility.
