The pitfalls and benefits of renting in retirement

More Australians - both young and old - will need to rent a home thanks to Australia's sky-high property prices. For some people, owning a home in one city while renting in a cheaper location to pocket the price difference can make sense. Others will need to weigh up the pitfalls and benefits of each option, particularly if they want to avoid the financial stress of renting, which impacted a quarter of retired renters in 2020.

By Nicole Pedersen-McKinnon

I was chatting with an excited, almost-50-year-old friend about her new retirement plan recently.

She has a fresh mortgage on an off-the-plan townhouse in the 'burbs, where she will spend probably another 10 years raising her 5 boys.

Then, she intends to sell and stay ‘sold out’, using her hoped-for profits to rent an apartment in the city for her retirement… and a life of recreation and relaxation.

So, if you won’t have a fully paid off home by the time you stop work, how valid is renting? Might it even represent the smarter financial move? 

How many people retire with a paid-off home?

With house prices having soared since Covid-19 lockdowns, and running hot as it was, many people now find themselves completely locked out of the property market.

Home ownership among over-65s is on course to drop from 76% today to 57% by 2056, says a forecast from the Grattan Institute. It’s also probable that less than half of low-income retirees will own by retirement, and that’s down from 70%+ today.

This shoots holes in the key assumption in retirement modelling: no fully paid off home and thus no dramatically reduced living expenses. And there goes, too, that insulation against escalating housing costs.

In these circumstances, the published estimates of how much every year of retirement will cost you are pretty useless. (We will get back to these and how you might adjust them if you are planning on renting.)

For people who do own their own property, that property often becomes a vital plank in their retirement strategy.

Whether or not you have managed to pay off a property, it can be sold. You can read more about the financial benefits of downsizing your home and putting the money in superannuation tax-free.

And of course, you don’t have to wait until age 60 (the preservation age to get at super for today’s under 60s) to do it.  

In other words, this could facilitate you retiring early.

Whatever the timing, like my friend, the idea of a house sale could be to rent so as to release equity to top up the money available for living in retirement.

More commonly, it is to downsize – still releasing equity and with a surplus from the switch – to a different, also-owned property.

The bottom, stark line is that renting on the Age Pension, without cash or capital reserves, is not a situation in which you want to find yourself. (Be aware that the Age Pension assets test is higher to account for that if you rent and you could also get rental assistance – but there is far more to this, below.)

Proportion of households as renters and home owners

The Retirement Income Review released in November2020 – the most recent report to look at the matter – identified ‘financial stress’ in more than one-in-four retirees renting private homes and more than one-in-three renting public housing. Here, financial stress is defined as having 4 or more ‘indicators’ like going without meals, being unable to pay bills on time, being unable to heat your home, and pawning or selling possessions due to being short of money.

That compares with less that 10% of retired homeowners in financial stress.

And if you want to retire early, without a home of your own or capital from selling it, renting may not be the best way. Renters aged 55 to 64 experience the highest rate of financial stress (more than 50%).

However, renting with decent money behind you – whether super or the proceeds of a property sale – could well be a different story…

The benefits of renting and pitfalls of home ownership

There are significant practical benefits to renting and pitfalls of home ownership… and most stem from being locked into somewhere you own.

Firstly, renters can move anywhere… and virtually ‘overnight’. Remember, you won’t be restricted by a job either. Unencumbered by a job nor a house, you could relocate to retire overseas. Or you could split your year between your favourite Aussie places, and family and friends.

Secondly (and you might not yet have your head around how significant this is), renters skip an awful lot of upkeep and repairs.

If you own a home and do repairs and maintenance yourself (if you have the ability and skills) it’s taxing on your body; if you outsource them, the cost will be almost like a tax.  

Might an owned property – think about your existing one, if relevant – cause you all sorts of day-to-day dramas? The renting alternative is picking up the phone to a landlord or rental agency and saying: “Please fix [x,y, z].”

You have to admit, the latter sounds appealing.  

The benefits of owning and pitfalls of renting

Principal among the pitfalls of renting, and benefits of owning, would be housing security. Though this is unquantifiable from a financial perspective, it’s everything.

You would want – and it’s feasible – our current rental crisis to have eased by the time you retire should you choose to rent.

Of course, if you own a home, your expenses are known and controlled.

And while you may still have to constantly weigh how much super versus, well, ‘life’ you have left, you won’t also have to factor in whether you will have the ability to cover your housing costs for whatever ends up being the necessary time.

The ASFA Retirement Standard estimates how much each year of comfortable retirement will cost you – it’s currently $51,278 for a single and $72,148 for a couple.

It has been several years since ASFA has calculated the renter equivalent so it might be useful to add on to the above figures, the ABS-listed additional annual costs renters face. Its latest Survey of Income and Housing says these are $14,508 for a single person and $18,148 for a couple. But this, too, is from back in 2019-2020, and housing costs in the past few years have escalated hugely.

You could, of course, add what you forecast you’d spend each year on rent, to ASFA’s figures.

Yet another valid predictor is to look at your overall outlay today – pre-retirement – and take a proportion; typically, a homeowner who clears their mortgage when they retire will see income requirements drop to two-thirds while a renter may not see the necessary amount drop much at all.

How much might it all cost, all up? The superannuation lump sums that ASFA says stretch to support homeowners to life expectancy are $595,000 for a single and $690,000 for a couple. Some estimates of the relevant figures if you are renting breach the $1 million mark.

Proportion of households renting, by age

How renting can hurt Age Pension payments

You should be aware that the ASFA figures assume you drawdown on all your super and therefore progressively receive more Age Pension over time.  

However, new modelling also reveals a large bias against renters when it comes to the income and assets tests to qualify for the pension ... particularly for singles.  

While a single non-homeowner is supposed to be able to get the full Age Pension with assets up to about $544,000, analysis by pension assistance agency Retirement Essentials shows that in some circumstances, this threshold cuts in at just over half – 53% – of that.

“Couple non-homeowners also can’t have all the threshold asset total in super to get the full Age Pension.  They can only have $505,000 of the [circa] $694,000 threshold, or 73%,” Retirement Essentials says.

“Meanwhile, couple homeowners can have their entire limit in financial assets without impacting their pension, and single homeowners are only marginally impacted.”

Why does this happen? Non-homeowners theoretically have a higher assets threshold to make up for the family home being exempt, and in recognition of the fact their expenses – think rent – are higher.

But those same assets that are supposed to be affording them the ability to live are also ‘deemed’ to produce income, which reduces the real amount that can be held without affecting the pension.  

“For single renter retirees, deeming eliminates the potential advantage of higher thresholds,” Retirement Essentials’ research found, in an outcome that is “misleading and unfair”.  

Here are the effective income and assets limits, versus the stated ones.

Retirement Essentials concludes: “It could lead to perverse outcomes where a renter might ‘invest’ in non-deemable assets such as cars just to get more Age Pension.”  

There is potentially rental assistance when a retiree qualifies. But, even though this was increased by 15% in the 2023 Federal Budget, it is still wholly inadequate.  

The aged care complicator

If few Australians think about their precise financial strategy for retirement, even fewer think about how they might then pay for aged care.

There are basically three ways: A refundable lump sum deposit, non-refundable daily rental payments or a combination of the 2. (There are also subsidies and supplements, capital grants and funding from the Federal Government, delivered through aged care programs.)  

Aged care is not always about moving into a nursing home, usually called residential aged care. Plenty of people with high care needs cannot get a place in aged care and must rely on government-funded home care packages or family. This can mean that living in a location close to paid and unpaid carers is important - and in some cases, that means renting.

So, yes, the kicker at the ‘conclusion’ is that aged care fees are worked out on your financial situation. And that is not ideal if you have previously burned through your assets for rent.

You can pay aged care fees with income from assets and investments, or from Age Pension payments.

There are, for instance, retirement villages where you can 'buy' the villa outright – for say $300,000 – but then use Centrelink rent assistance to fund the land that it is kept on. You could then use your Age Pension for other expenses.

However, without funds at your disposal, you might be restricted to a Government-subsidised nursing home, should you later need to go to one, rather than a private facility. And that may well not be your preference.

Should you rent in retirement? The considerations are, well, considerable.

^{Advice given in this article is general in nature and does not take into account your personal circumstances. It is not intended to influence readers' decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.}