Homeowners vs renters in retirement, by the numbers

Retired actuary John De Ravin explores the outlook for retirees who own their home and for those who rent.

Homeowners vs renters in retirement, by the numbers

“Your home is your castle”, according to the old saying, and Aussies really take that to heart, more than the residents of just about any other nation on earth. 

Some of the advantages of home ownership are obvious. For one, if you own your home, you’re not at the mercy of a landlord who can turf you out, or increase the rent at the end of each lease period, so owning your home means security of tenure. Also, if you own your home, you can decorate and renovate it as you see fit without needing to seek anyone’s permission. And there’s that indefinable feeling of attachment to a piece of physical earth, and a building, that brings comfort. 

But apart from those advantages, there are two benefits of home ownership that are distinctive to Australia.  First, your ‘principal residence’ is an important exemption from our capital gains tax (CGT). Even if you sell your home for twice, five times, or even 10 times what you paid for it, you won’t normally pay a cent in CGT. The CGT exemption contributes to home ownership being a great investment.

But the other thing, which is especially relevant for retirees and pre-retirees who hope to receive a part or full Age Pension, is that the Age Pension means testing arrangements in Australia are very generous to homeowners. In fact, regardless of how valuable your home may be, it isn’t counted in the assets test. You can own a $5 million home and, as far as Centrelink is concerned, that asset is worth precisely $0 when it comes to the assets test.

Case study: Bill and Mary
Bill and Mary are 66. They are both recently retired. Because Bill’s employment involved many relocations, they never bought their own home. However, they have lived modestly and contributed to super, so they have built a decent financial asset base of $850,000, entirely in superannuation. Now that Bill and Mary are no longer employed, they want to settle down and stay in one place for many years, near their children and grandchildren. They are trying to decide whether to rent or buy.

Let’s compare their situation according to whether they decide to buy or rent. The table below shows their income and expenses if they rent, compared to if they buy a property for $600,000, leaving $250,000 with which to take out account-based pensions.

Item of income or expenditure

BUY

RENT

Income from account-based pension

$12,500

$42,500

Age Pension

$36,582

$16,692

Rental Assistance

$0

$3380

TOTAL INCOME

$49,082

$62,572

Rent

$0

$24,000

Other property expenses (rates, insurance)

$3000

$0

TOTAL PROPERTY EXPENSE

$3000

$24,000

NET INCOME TO SUPPORT LIFESTYLE

$46,082

$38,572

To prepare the table, it’s necessary to make some assumptions about the rent they would pay to live in a $600,000 property equivalent to the property they are thinking of buying. I’ve assumed they would pay an annual rental of four per cent of the property value. I’ve assumed that if they own their own home, they will have to pay annual rates and buildings insurance of $3000 that they would not have to pay if they choose to rent. And finally, the table assumes that whether they take out an account-based pension with $850,000 (if they rent) or $250,000 (if they buy a home), they will draw down on their account-based pension prudently at the statutory minimum rate of five per cent per annum (as many Australian retirees do). The Age Pension entitlements in the table assume they own $10,000 in non-financial assets as well as their financial assets.

So, you can see that Bill and Mary are much better off if they own a home. The main reason is that they get much more Age Pension if their assets are in their home (where they don’t count against the assets test) than if all their assets are held in their account-based pensions (where their assets are fully asset testable). Effectively, Bill and Mary will receive an additional $16,510 in total Centrelink benefits (Age Pension plus Rent Assistance). Also, as owners, they will not have to pay rental expense. The upshot is that if they own their home, they will have $46,082 to support their lifestyle, but if they rent, they will have only $38,572. In other words, they will have 19 per cent more to spend on their lifestyle (other than their property expenses) if they choose to buy than if they rent. 

What’s more, the Age Pension is payable by the Australian government, and will be indexed to average weekly earnings, whereas their main source of income, should they keep all their assets in their account-based pensions, will be subject to the vagaries of the investment markets. Typically, their house will continue to grow in value, and will form a large part of their bequest to their children or other beneficiaries, whereas the balance of their account-based pensions is likely to decline over time, especially if they survive beyond their mid-80s.

But what if you can’t buy a home?
We saw above that life is financially more comfortable for couples who own their home once they reach Age Pension age (and the same applies to single Age Pensioners). If a couple, such as Bill and Mary, don’t own their home as they approach retirement but do have the financial assets to buy a home, it’s not too late. There is nothing to stop them from buying a home shortly before or shortly after they retire, and then collect the larger Age Pension that they may thereby be entitled to. 

But what about couples who are approaching retirement, but who don’t own a home and don’t immediately have the resources to buy one? Here are some of the strategies such a couple might consider.

  1. Continue in the workforce longer to save, inside or outside superannuation, with a view to having enough to buy a house by the time they retire.
  2. Consider moving to a less expensive location (perhaps a rural or regional location) if that means they will be able to afford to buy a home.
  3. Undertake a little part-time work in retirement – but avoid earning more than the income test free threshold.
  4. A non-homeowner couple should ideally target a level of assets, by the time the couple is eligible for the Age Pension, of about $650,000. Non-homeowner singles could consider targeting an asset level of $550,000. While you will not receive a full pension if your assets exceed these levels, you would get almost the full Age Pension.
  5. If you can’t afford to buy a home, consider moving to a location where rents are not too high a proportion of your Age Pension. 


Without a home, your lifestyle in retirement will be a bit more financially constrained, but a bit of part-time work and the right level of assets should produce a satisfactory lifestyle, even though you will have to continue paying rent.

Have you been fortunate enough to retire as a homeowner without a mortgage? If you rent, has it had a big impact on your retirement income?

* John De Ravin is a retired actuary and author of Slow and Steady: 100 wealth building strategies for all ages. Slow and Steady, available from johnderavin.com, explains the key financial strategies that can help pre-retirees and retirees prepare for and enjoy the best retirement possible.

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Disclaimer: All content in the Retirement Affordability Index™ is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. It has been prepared with due care but no guarantees are provided for the ongoing accuracy or relevance. Before making a decision based on this information, you should consider its appropriateness in regard to your own circumstances. You should seek professional advice from a financial planner, lawyer or tax agent in relation to any aspects that affect your financial and legal circumstances.





COMMENTS

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Mariner
19th Apr 2020
2:33pm
If it wasn't for the constant buying and selling of rental properties I would never have bought a dwelling. In 1970 I was told that everybody here has to buy a place to live in, otherwise it would be a constant move from flat to flat because the owner planned to sell it again for profit. Proved to be true looking back. My sister in Zurich lives at the same address since 1978 and never shifted apart from a refurnishing program which required her to live at another close location for a few months, provided by the landlord. That said the rent increased when she went back but everything was brand new. She still lives there now and she has more than a million in investments. She does not have to own property.
Blossom
20th Apr 2020
11:57am
Housing Loan Interest Rates are low at the moment. Now is possibly a good time to buy property if you have a reasonably high deposit. You may even be able to pay extra off your loan without being penalised at all.
Maggie
21st Jun 2020
6:39am
It's not easy for older people to get a mortgage.
Oldchick
18th Jun 2020
11:54am
$3,000 for property rates and expenses if you own your own home?? I don’t think so. My Council rates alone are $2,000 on a modest $320,000 house. Insurance another $1k, annual pest insurance over $200, yearly aircon maintence nearly $200. All the things someone renting doesn’t have to worry about. Water service breaks down, aircon stops working, plumbing problems, electrical problems,.... call the landlord. I prefer the security of my own home but I do disagree that homeowners are so much better off financially. It’s just not so.
KSS
18th Jun 2020
1:03pm
Yes oldchick. Those costs are never included in these sort of articles. And $3000 is way too low too. Likewise water charges are not generally paid by the tenant either, that's close to another thousand. Just 1 week ago my hot water heater gave up the ghost and that cost just short of $2000 to replace. Another cost never taken into consideration that renters dont have to pay for - repair and replacement of essential appliances lije water heaters and cookers. And on top of all that, homeowners are allowed fewer other assets than renters too to the tune of around $250000 less.
Virginia
18th Jun 2020
3:00pm
Well I am sceptical of your figures I live in SA and its much cheaper to run my home and its valued over $800000 than to rent one. and keep up repairs . my air con maintenance is $70. per annum and how often does one replace stuff. Heater, light bulbs etc. and cookers!!!
Tanker
18th Jun 2020
3:57pm
KSS you must be living in a very expensive place, be it area or property. I live in Melbourne and our rates and expenses are way lower than yours.
Things like cookers, hotwater heaters etc last for many years so it is misleading to include that as if it was a continual cost. Should a landlord replace those the cost is tax deductable.
Your water rates are very high also as ours are well under yours and it is not accurate to say water charges are not normally paid by the tenant.
It is much better to own your home in retirement than to rent.
Hasbeen
18th Jun 2020
8:27pm
My council rates in a rural area South of Brisbane are $3400 a year, & my insurance is $1700 a year, on a value way under that of major capitals. I changed the insurance company just before Christmas, the old one wanted $2450.
Mez
19th Jun 2020
11:37pm
KSS, .....Water rates ARE PAID BY THE TENANT NOWADAYS FOR A GOOD MANY YEARS whereas the owner did in the past when it was also dirt cheap!
KSS
20th Jun 2020
6:33pm
MAZ THERE IS NO NEED TO SHOUT. I rented up until 8 years ago when I bought my own place and did NOT pay for water usage at all. I did pay for hot water but that was not for water supply but the gas to heat it! And that was on top of my electricity bills which were paid seperately.

Tanker, I live in a modest older two bed unit with no 'facilities' in a poor relation suburb surrounded by far more expensive suburbs and property. BUT the council area is expensive and therefore council rates are high. In fact we have just been notified of a 2.5% increase in rate charges from 1 July! And these charges don't even include strata fees which for me come to $4000 alone!

Some of you are living in cloud cuckoo land if you think everyone pays less than $3000 a year to live in their own home.
Oldchick
24th Jun 2020
11:40am
Virginia, I also live in SA and yes my Council rates are high. My Evap aircon costs $80 to shut it down at the end of the season and $80 again to start it up. Sure, you don’t replace the hot water system every year, or the stove. I did that recently when the old one died. Bought the cheapest at $749, $250 to have it delivered and installed. Waiting on the electrician to fix lights not working, replace out of date smoke detectors... I’m on a DSP and I work to a strict budget which I monitor on an Excel spreadsheet from year to year. Everything goes into it so I do know what running my house costs me.
fish head
18th Jun 2020
12:34pm
I would say that the home owner's biggest advantage is obvious - security on a diminishing income. One less major worry
Keith
18th Jun 2020
12:42pm
Rubbery figures. A lot of retirees prefer apartments to looking after a house. Plenty of rental properties on the Gold Coast for $20k PA....take off rent assistance & its About $16k Rates, body corps, levies etc to own the place can easily be over $10k. I lived in a place where that was $13k & it rented for $18k after rent assistance. And if there’s issues with neighbours or construction faults (hello sinking fund) you simply hand back the keys & find another place ...plenty around .
Keith
18th Jun 2020
12:46pm
Also..I’ve always owned houses before,,but prefer the freedom & savings on leasing. Asshole neighbours ,council disputes, market slumps hard to sell....forget all that. And, you don’t accumulate a lot of crap you never use. But at the moment , I’ve got a place on the beach in SE Asia for $70 a WEEK. Grinning like a goat eating thistles.....and no Virus lockdowns or bullshit here.
Paddington
18th Jun 2020
2:38pm
Why is there no virus there? If it is a third world country they are extremely vulnerable.
Maggie
21st Jun 2020
8:30am
Enjoy it while you can, Keith. The virus is there, and sadly, it's going to be horrendous.
Paddington
18th Jun 2020
2:41pm
I asked my sister years ago if it was possible to live on the pension and her reply was only if you own your own home which we made sure we did, luckily for us. Most of our kids, on the other hand, do not, which is a worry.
patti
18th Jun 2020
3:46pm
It depends on your income I guess. As a homeowner who was paying a mortgage, and totally dependent on the Age Pension, I did not qualify for any form of assistance, unlike a person who rents. Of course the rent assistance is totally inadequate give how much rents are now. The Age Pension seems to be set at a rate which assumes that you have paid off a home, and have no outgoing housing costs. It is what it is.
Mariner
19th Jun 2020
9:04am
In the old days you never got a mortgage to last over your 65 years of age. Was told that quite clearly by the bank. After deregulation that went by the way and now we have pensioners with mortgage problems. Not a nice place to be!
Arvo
18th Jun 2020
5:24pm
I've done this exercise many times year in year out. The equity in your home and potential increase in the future value of your home beats renting, especially if you don't have any financial debts. It is true that the only fixed expense in renting is the rent and power supply, other than groceries etc, but you have to account for the ever annual increase of rent, power supply, other variable living costs and the insecurity of long term residency. The problem for all aged pensioners is cash flow.
cupoftea
19th Jun 2020
10:53am
I have a state Seniors card so my Rates are about half, my water rates are about half my Driving licence about half and I get money to assist in my electricity, my Rego is about half I thought i would mention that as no one else has
Gams
19th Jun 2020
11:48am
I would like to know where you got the figure of over $36,000 for Aged Pensioner from. I'm single aged Pensioner and receive $944.30 per fortnight = 24,551.80 per year. Poverty Rate.
Mez
19th Jun 2020
11:32pm
Bill and Mary would NOT be getting Rental Assistance with their age pension if they own their home as you have stated in the article!!!!
Arvo
20th Jun 2020
11:25pm
There is a group of pensioners living in a caravan park owned by a not-for profit church organization paying $167 per week rent that includes water and electricity. The organization sent them a letter saying that in August it will increase the rent by $10 per week to cover increasing operating costs. The residents raised a furor objecting to the increase.
What a lousy load of people they are whinging about a $40 a month increase. As OAP I just had to pay a power bill for usage over last 30 days of $390, that's $13 per day ! just for some heating during the cold days and nights down south, on top of other outgoings. These creatures have no idea how fortunate they are to pay an extra $10 per week rent that includes cost of electricity. What a load of shallow minds they are.
Maggie
21st Jun 2020
6:57am
It might be a good idea to look into some more insulation! And possibly that your bill was for 2 months, not one.
I have a 1 bedroom unit with a relatively large living room and that's the only room I heat apart from the bathroom where I have a wall heater - it's on for approx 30 mins when I shower.
In 6 years my bills have never exceeded a smoothed out $ 180 per two month billing period. I don't stint on the heating either.
Arvo
21st Jun 2020
6:27pm
Maggie, No, It's for 30 days usage. I self report every month. I get billed every month. I take a photo of the meter reading to avoid errors. I record month to month usage. If you lived down South you'd know how cold it gets at end of Autumn.
Alan
21st Jun 2020
1:31am
Since marriage I have lived in rental accommodation for 2.5 years when I was working in Jakarta, Indonesia. I had family assistance when building my first home and have since been able to help my children with their first homes. I now live in a good sized house. I do not receive the Old Age Pension and have no expectation of being able to receive it - the only way that I could receive any of the Old Age Pension would be to sell my existing house and taken three quarters of the funds in the SMSF and buy a macmansion. If I did that my I could get some pension and my children would get a larger inheritance. I have ethical objections to actions that distort financial affairs to attract a pension. I would like to see a variable threshold limit and have the family home included in the pension asset test.
Priscilla
21st Jun 2020
4:27pm
Definitely better to own your home in retirement. No rent/mortgage to pay. If you rent, you are paying rent forever and if you are on a pension it makes life extremely difficult.
Chris B T
22nd Jun 2020
9:06am
The $250 k would be less left over the Home owner Asset Test (2 Different Asset Thresholds), which is substantial.
Paint a Picture to suit a situation: with Rates, Insurances and Reasonable Maintenance Costs at very low figures that are about 15 years ago.


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