Is it possible to rent into retirement?
Posted on: 23 Aug 2017

Is it possible to rent into retirement?

Fellow renters unite! As part of the renter generation, whenever I talk about retirement, it usually leaves a trail of panic in my wake. 

From parents, to politicians to journalists – everyone is increasingly concerned that us renters will be retiring without a roof over our heads.

Contrary to popular belief, it is possible to live comfortably to retirement (and beyond), without owning a home. Here is our three-step plan for your happy, secure and property-free retirement.

Before we dive in, let’s get something out of the way: this article isn’t going to tell you whether you will be better off renting than owning a house (that’s dependent on a bunch of variables) – but helping you to understand how to retire comfortably if you decide to choose the rent path.

First up – rent vs own.

Let’s pretend for a moment that you are a 30-year-old renter in Melbourne or Sydney and in the market to purchase a home to live in. In this scenario, you are currently renting a home for $700/week (or $36,400 annually) – and you are looking to purchase the home you live in, or an equivalent. Thanks to some financial frugality (and some good financial advice) you have saved a $200,000 deposit.

Taking into account the market price of $1.3m and added stamp duty, you’ll be looking at committing to a $1.16m mortgage. Taking into account a few standard factors such as interest rate (4.5% in this example), rates and maintenance – you’re looking at an annual cost of $79,291.

In the other hand, you can choose to rent for the rest of your life. Taking into account a 3% annual rental escalation, by the age of 60 your rent will reach $88k per annum. Not time to panic yet though – follow our three steps to generate enough investment income to cover the rent for the rest of your life, and have plenty of spending money per annum.

1. You still have to save
You may have made the decision to rent, but if you want to retire comfortably you still have to save as meticulously as your home owning friends. Our strong advice is to save the difference between your rent, and the cost of owning the same home. In year one (taking into account our previous scenario), that’s $43,000. The rent is going to increase – making the early years of saving particularly important. By the end of the 30-year period, our rent will certainly be more than the cost of owning a home – but by then we will have saved a kitty of cash to cover it! Don’t get us wrong, you need discipline to do this – but it certainly is doable.

2. Minimise tax on your investment returns

Homeowners may get a few perks from the tax office, but that doesn’t mean us renters are going to be left out in the cold. The big one is to get your savings into a super fund where the tax rate on long term investment gains is only 10%. If you can keep your tax rate low, by the time you are 60 you will certainly reap the rewards. If your savings (aka your cash kitty) is outside of your super you are likely to be pushed into the tax bracket. Speak to your financial advisor about how you can use your super fund to get your tax rate even lower than 10%.

3. Maximise your investment returns
Cash in the bank alone (aka your cash kitty) won’t cut it. You need to be smart about your investments to ensure that your money is working for you. Minimise costs, and make sure the portfolio is invested in a portfolio of real assets like shares, property and bonds. You should target total portfolio administration and management costs of less than 0.5% per annum, either through a low cost industry fund or running your own self-managed super fund.

In conclusion: don’t panic
It’s important to not make the decision of renting for life lightly, but if you do – you need to be just as financially meticulous as someone with a mortgage. This combined with smart and strategic investment - come retirement you’ll have nothing to worry about.