Breaking news! Home ownership, if done right and in long stretches, can result in lower housing costs than if you were to rent that same house. OK, so you already knew that. But remaining a homeowner into your 60s? Now you’re just overstaying your welcome. By planning now to be a renter later, you can shave several years off your work life.
Imagine the Following Scenario
You’re pushing 60 and itching for financial independence. You own a $1 million house debt-free and have $1 million in investments. Your total annual expenses normally total around $70,000—$20,000 for housing costs (repairs, maintenance, taxes and insurance) and $50,000 for everything else.
Let’s not worry about income taxes or any other income streams for now because those won’t have a big impact on your decision. Also, we’ll use my quick rule of thumb that you should have a nest egg worth at least 20 times your desired annual spending.
Is it better to own your house forever or sell it and rent?
The Forever Owner
To support your annual spending of $70,000, you’ll need to grow your $1 million portfolio to $1.4 million. It’s hard to predict how long that will take. Five years? Ten years? In any case, you’re many years away from financial independence.
The Wealthy Renter
Let’s instead assume that if you sold your house, you could rent an equivalent house for $50,000 per year, bringing your annual expenses up to $100,000. Using my same 20x rule, you would need a $2 million portfolio. If you can net $1 million on the house, you now have a $2 million nest egg. In other words, you’re immediately financially independent.
Saving to Rent
There are reasons to keep your home, like creating an inheritance for your heirs or because you really like your garden. But if you start exploring now what your life might look like as a wealthy renter, you’ll at least know how many more years you’ll spend in your “have to” work life instead of being financially free in the decade where you’ll most appreciate it—your 60s!
Why 60, you ask? We’re living longer these days, right? Stay tuned for my next blog …