The biggest cost in retirement might be your home

You may figure it’s better to own your home than to rent when you’re retired.

But then you get hit with an eye-watering bill for roof repairs. Or your condo board approves a special assessment. Or a pipe bursts in winter. Or the air conditioning breaks down in summer. Or you need to replace a major appliance. Or your city or town jacks up property taxes.

And then you remember why it’s not always a terrible thing to be a renter.

A new study by money manager T. Rowe Price about spending in retirement unveils two things that will probably come as a surprise to many people — and especially to those not yet retired.

The first is that spending from year to year is much more volatile than you might think.

And the second is that it’s these home expenses, rather than health expenses, that are most often the main cause.

On the volatility of spending, the study found that during a two-year period, about a quarter of retirees experienced a jump in expenses of at least 17%. Maybe more remarkably, during their entire retirement, more than one retired household in five experienced at least one year when their expenses went up by at least 50%.

“That’s why we stress on the need for liquidity,” the study’s author, Sudipto Banerjee, tells MarketWatch.

This was based on a study of a representative sample of 1,306 households over 14 years, from 2005 to 2019. The data came from the University of Michigan’s long-running Health and Retirement Study and supplementary Consumption and Activities Mail Survey.

For most households these sudden jumps in expenses were the result of “nondiscretionary,” in other words necessary, spending, T. Rowe Price found (Only among retired households with earnings above $150,000 a year were big jumps in spending the result of discretionary spending — in other words, choice.)

And the biggest cause was home-related or housing expenses. These accounted for a full 25% of the expense volatility of the retired, compared to just 5% for health expenses and 3% for transportation.

Renting and owning a home both come with advantages and risks. Homeownership allows you to build equity, with leverage — so long as prices keep rising. It also allows you protect yourself against the risk of rising rents.

But the advantages don’t always run in one direction. Housing is an illiquid asset: It’s not always easy to convert it to money. As the T. Rowe Price study shows, it exposes you to the risk of big costs, as well as the hassle of actually dealing with issues. When you rent, that’s the landlord’s problem. Renting can also get you access to buildings with facilities, like gyms, and pools, and so on, that aren’t easily available to a homeowner.

And sometimes, and especially during housing bubbles, renting costs less per year than ownership.

U.S. house prices nationwide are now 44% more expensive than they were just before the pandemic, in February 2020. And, according to — which, like MarketWatch, is owned by News Corp. — they are actually falling.

As U.S. housing affordability is now very bad, while the payout rates on lifetime annuities and inflation-protected Treasury bonds are now much better than they were, retirees can always run the numbers on selling the home, throwing the money into bonds or an annuity, and renting. And you’ll never have to worry about calling a plumber again.

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