We’re in our 60s and have millions of dollars for retirement — should we rent or buy our next home?

May 7, 2021

My wife and I recently sold our home. After paying capital gain taxes, we look to net about $1 million. We are both in our late 60s. My wife is retired, and I work part time in my profession, currently grossing approximately $50,000 a year. I anticipate that this will decrease within the next couple of years, and imagine myself fully retired in two more years when I am 70. 

Besides the proceeds from the sale of our house, we have about $2.3 million in a stock/bond/cash portfolio (probably a little heavy on stocks but really not a concern). Our gross income from sources other than my job (including dividends and interest, Social Security, and my wife’s pension) is about $110,000 per year. This amount should be enough to comfortably cover our normal living expenses.  

We live in Colorado, and are moving closer to skiing in a very nice town in the mountains. We are renting a house for a year, which is $3,200/month. That’s a normal amount of rent in this mountain town. Buying a house/condo in this part of Colorado may take about the $1 million we have from our former house, although I would be aiming to spend less.  

So my question is, should we continue to rent or buy? I figure we have about 10 years to live in this new town, before moving again to live nearer our children in our old(er) age. I’m thinking that if we buy, real estate in this town will continue to increase in value over that 10 years. On the other hand, I’m thinking that we could instead rent, take the $1 million from the sale of the home, and invest it.  

Of course, there are considerations to both approaches that have nothing to do with money. However, I would appreciate your thoughts on the financial aspects of these two options.

Thanks for your help!

Happy in Colorado.

See: Can I afford to retire if I sell my home while prices are high? My plan is to rent and wait for prices to fall

Dear Happy in Colorado,

Congratulations on building such a great nest egg for your retirement and also on the sale of your home. These are huge accomplishments, and you sound like you’ve done really well for yourselves! 

I love that you ask this question about buying or renting a home. It is a question so many people have, and there’s a misconception that buying a home really is always the right answer. The truth is, renting makes just as much sense for some people and it always depends on each individual scenario.  

You’ve already touched on the pros of either route. If you buy the home, you own it — which is great — and you’ll also potentially see growth in value. If you rent, you can invest the amount you’ve made off of your home sale, and also see a return on your investments. 

“There is a high likelihood that they’ll come out on top financially renting or buying,” said Chris Owens, a certified financial planner and senior adviser associate at Wealthspire Advisors. 

Owens breaks the two options down for us. The cost of renting for 10 years, with an added 2.5% inflation rate to adjust for rent increases, would be about $393,000, he said. If you invested the $1 million while you rented, you’d need a roughly 4% return each year to cover the costs of your retirement. “Over a 10-year time horizon, that is a reasonable return expectation for a balanced investment portfolio between stocks and bonds,” he said. 

Also see: We have $1.6 million but most is locked in our 401(k) plans — how can we retire early without paying so much in taxes?

Now if you were to buy, and you were to find a home for less than $1 million like you said you wanted to, the extra cash you were able to save could be used for any unforeseen expenses, Owens said. Before you go down this path, you should consult with experienced real estate professionals who could provide context on the local real-estate market — what prices were like in the past, how they compare to today, and what is to be expected over the next 10 years. “Ten years may or may not be enough time to give their property time to appreciate,” Owens said. (And of course, vet the professional you work with). 

If you forecast a 3% or more increase in the value of your new home, buying would make sense, said Tom Balcom, founder of 1650 Wealth Management. Buying may also be the right answer for you if you enjoyed being homeowners in the past, intend to have some sort of mortgage and can take advantage of low interest rates, said Charles Sachs, chief investment officer at Kaufman Rossin Wealth.

Before I continue with the rent versus buy debate, I did want to touch on one more thing you mentioned in your letter about your investments leaning more heavily on equities. It makes sense that a higher allocation to equities isn’t as much of a concern for you, especially considering your Social Security, pension and other income is able to support your living expenses, but you may still want to check in on that asset allocation every once in a while, or engage a financial adviser in the future. The government’s proposal for upcoming tax law changes could affect equities in a taxable account with a low cost basis, Owens said, so you may want to sell or gift those assets before the tax updates are made. 

Another thing, please don’t forget to factor in healthcare costs in retirement and make a basic budget for your spending in this next decade. There are so many other aspects to personal finance to keep in mind, including taxes, estate planning, and insurance needs. 

“This may or may not be included in their current spending, but rising healthcare costs are affecting everyone and are an important aspect to consider in retirement planning,” Owens said. “Given that they are planning on living in a resort mountain town, they should also consider the amount of money they plan to spend on outdoor recreation costs, such as skiing and the use of any resort facilities.” 

A financial adviser could walk through these factors with you and develop a comprehensive financial plan, also taking into account other, non-housing specific retirement goals. 

Check out MarketWatch’s column “Retirement Hacks” for actionable pieces of advice for your own retirement savings journey 

Now back to renting versus buying. 

Many advisers said renting could make a lot of sense for someone in your situation and based on the information you provided. Of course, this is all very preliminary as we do not have copies of your financial records, but these are basic considerations for you to make. 

If you were to buy, plan for property taxes, unexpected maintenance and repair expenses, insurance (including windstorm, flood, hazard and so on), any homeowner association dues there may be (depending on the type of real estate you purchase), Balcom said.  

Generally speaking, aside from the possible rent hikes, renting does come with fewer headaches. As renters, you do not have to worry about paying for any maintenance costs, and there’s also more flexibility if you didn’t have such a long-term lease to relocate, Owens said.

“Since they have sufficient assets to cover the costs, this will provide them with flexibility to make their next move,” he said. “Since they’re already comfortable with their current income covering all of their additional living expenses, the need for greater growth in their assets is not as important and not worth the extra risk.” 

Ultimately, the decision will come down to personal preference — and maybe, it may be better to look at the housing market in general over the next year or two with an open mind. “With housing as tight as it is these days, they may be best served to search for homes both to buy and rent with the idea that if they really fall in love with something they should buy it and if not, perhaps rent until they find something to buy,” Sachs said. 

Have a question about your own retirement savings? Email us at HelpMeRetire@marketwatch.com