Why Empty-Nester Renting Makes Good Financial Sense
Empty-nesters choosing to downsize is nothing new. The kids are grown, off to college or financially independent. The upkeep of a larger home is simply more trouble than it’s worth. What is new, however, is the amount of baby boomer empty-nesters choosing to rent rather than purchase a smaller home. For the first time in history, America’s renter population has shifted to a 40-and-older majority. The reasons are clear.
The New Age of Renting
When we think of typical renters, we often picture fresh college graduates out on their own for the first time. They are looking to test the waters of living on their own without the risk or financial gut-punch of buying a home. They want to be near the action of their city. Perhaps not so surprisingly, empty-nesters want these same benefits, too.
Over the last two decades, the population of older renters has grown steadily. In 1995, 43% of renters were 40 or older. In 2005, that number was 47%. In 2016, the 40-and-older renters make up 51% of renters in the United States. This accounts for 22.4 million households. While the desire to partake in the benefits of renting can certainly account for part of this shift, lasting effects of the 2008 housing crash and the aging population of baby boomers (born between 1946 and 1964) undoubtedly give reason for this change.
A 2013 report from Harvard University’s Joint Center for Housing Studies suggests that the baby boomer generation will contribute 2.2 million more renters to the senior renter population by 2023. This is when the majority of this generation will have reached 65 years of age. In the next decade, this demographic is expected to continue to account for half of renter growth.
Adults approaching retirement, even those with significant wealth, are eager to sell their homes and embrace the freedoms of renting. The Associated Press reports that “the number of rental households earning in excess of $100,000 has risen by 1.6 million in the previous decade.” Regardless of wealth, renting often makes better financial sense for younger millennials and empty-nesters alike.
Making Dollars and Sense of Renting in Retirement.
The market choosing to rent in older age has seen the downfall of the housing market – many times. They’re wary to tie up the majority of their investments in a home they may not want to be in for much longer. They don’t need the wasted space of a larger home requiring upkeep, costly maintenance and homeowners’ association fees. Their home mortgage may be paid off or close to it. They aren’t getting much of a tax advantage by staying in their home. They want more predictable monthly expenses. Regardless of their personal reasons for shifting away from home ownership, for most middle to upper-middle-class Americans, downsizing to a rental as retirement approaches just makes better financial sense.
According to the National Association of Realtors, home appreciation has averaged 5.4% returns since 1968. Standard & Poor’s index has averaged 10% during that same time period. With this information, it’s no surprise that many retirees and empty nesters will take earnings from a home sale and put that into other investments, rather than another home. If their home value falls in a certain bracket, they won’t be penalized with a capital gains tax from a sale and can move towards increased monthly cash flow by renting.
Liquidity is key here. Selling the family home and renting a more manageable place means that assets and investments are liquid and easily available. As mentioned in Forbes magazine, “When you’re not putting money every month toward your mortgage, insurance, upkeep costs, and taxes, you can dedicate your cash flow to other things, whether it’s traveling or developing a new hobby. When you sell your home and rent a place instead, you’ll also be able to tap into your home equity, giving you significantly more money to either spend or save during retirement.”
More than Financial Freedom, it’s a Lifestyle.
Trading a mortgage for a lease often offers more than just financial benefits. The dollars may be helpful, but the lifestyle changes are meaningful. Whether it’s proximity to work, restaurants, shopping, museums or parks, with more free time than they’ve had in decades, adults in their golden years want to return to the centers of activity and often look for more urban living options.
CNN Money affirms that amenities are attracting older renters, too. “They have everything they need in their building.” They don’t have to worry about chores like mowing, landscaping, or maintenance issues. Some developments are specifically geared toward those who are “renters by choice”. They combine the perks of home ownership like modern kitchens and individualized interiors with the ease of a leased, maintained setting. Renters get the resort pool, gym membership and grocery delivery along with designer interior finishes and their own garage.
The time and money required to maintain a family home may be better spent on travel, exploring new hobbies, or just enjoying your city. Today’s empty-nesters are finding that life after 40, 50, or even 60 is the perfect time to invest in yourself, not in a home.