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This Is the Biggest Risk If You Rent in Retirement

Updated: 03-11-2024, 08.36 AM

Renting in retirement is becoming more commonplace. According to a 2023 report by the Joint Center for Housing Studies of Harvard University, 7 million older adult households rent their homes. While this might seem like a good option for some retirees, money expert Suze Orman warns that this may not always be the best idea financially.

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“There are all sorts of very good reasons to rent. I want to be clear that renting can be a smart way to go,” she wrote in a post on her blog. “But if you are currently a homeowner and think you may make a move and choose to rent, I want to make sure you are not blind to one risk.”

Here’s the risk you need to consider if you are thinking about selling your home and becoming a renter in retirement.

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Orman said that the biggest risk to retired renters is inflation. When you own a home, your housing costs are predictable. But if you rent, your costs will likely increase over time.

“You need to plan for the fact that your landlord will raise your rent from time to time,” she wrote. “I know that may sound obvious, but it’s not human nature to carefully think through what things might cost five, 10 or 20 years from now.”

It’s important to factor rent increases into your budget, especially when you are living on a fixed income.

“The bottom line is that rents rise over time,” Orman said. “The average increase has been around 4% a year, but lately it has been higher.”

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To illustrate her point, Orman gave some projections of what you can expect to pay in future years if you are currently paying $1,000 a month for rent and your rent rises at a 4% annual rate.

According to Orman, in five years you can expect to pay $1,220; in 10 years you can expect to pay $1,480; in 15 years you can expect to pay $1,800; in 20 years you can expect to pay $2,190; and in 25 years you can expect to pay $2,670.

“At a 4% average rate, your cost to rent doubles in 20 years,” she said. “That doesn’t make renting a bad option. The issue I want you to address today is making sure you have the ability to keep up with rising rents.”

Orman believes that if you plan ahead for rising rents, you’ll still be able to live comfortably in retirement.

One way to do this is to choose to rent in a place that is currently well below your means.

“A rent that doesn’t stretch your budget today gives you room to absorb future rent hikes,” Orman wrote. “As I have long advised, live below your means but within your needs.”

You should also delay taking Social Security benefits if possible.

“Aim for the biggest possible Social Security benefit,” Orman wrote. “The longer you can wait between the ages of 62 and 70 to claim your retirement benefit, the higher your payout will be. That higher payout will be so valuable to cover (rising) living costs for a much older you.”

Orman also recommends keeping a portion of your retirement savings invested in stocks.

“Remember that stocks deliver the best inflation-beating gains over the long term,” she wrote. “Having a portion of your investments in stocks in your 60s and 70s can be a smart way to help you cover rental costs in your 80s and 90s.”

Depending on your individual circumstances, renting in retirement can be a wise financial decision.

“In some instances, renting may be part of someone’s retirement strategy,” said Clare Trapasso, executive news editor of Realtor.com. “It really depends on the individual, their goals, their financial situation and where they live. If they’re able to sell their homes for a large profit, it may be cheaper to rent than to stay in the home or downsize into a smaller one.”

Renting may also make better sense for your retirement lifestyle.

“If they want to travel, live abroad or experience a community before committing to it, then renting may make financial sense for them,” Trapasso said. “They may not be able to afford the high upfront costs of buying a home in a popular 55-plus community, but may be able to swing renting in one.”

Additionally, retirees may find that their homes are no longer safe or suitable.

“Their homes may not be equipped for aging in place or their physical challenges,” Trapasso said. “In some circumstances, it may be cheaper to rent a home that is outfitted for their needs than to retrofit their existing one. That may be especially true if they sell their homes and are able to use the proceeds to rent in an assisted living community.”

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This article originally appeared on GOBankingRates.com: Suze Orman: This Is the Biggest Risk If You Rent in Retirement