Retirement: Does renting make more financial sense? - Nadine Higgins

FSC data shows downsizing may fund just three years of retirement. Photo / 123RF

THE FACTS

• Retirees face challenges with downsizing, as it often funds only three years of retirement.
• Options like selling and renting, reverse mortgages, and family involvement have trade-offs and costs.
• Using tools like Sorted’s Retirement Navigator can help assess financial strategies and risks.

“Asset rich, cash poor” is a common problem among retirees, especially in a property-mad country like New Zealand. You might own your own home, but either don’t have any savings, or those savings quickly run out.

The usual assumption is that downsizing is the solution – releasing the cash required to replenish the savings account and supplement NZ Super.

But in practice, it’s seldom that simple.

Financial Services Council research suggests downsizing would fund just three years of retirement – which is a lot less than many are relying on!

I’ve seen it crop up with several clients – the family home doesn’t fetch as much as they’d hoped, and a home that’s appropriate for their needs in retirement costs more than they anticipated.

So, if downsizing isn’t going to release as much cash as you need it to (or you’ve already downsized, or downsizing isn’t an option) – what are you to do?

The good news is there are options, the bad news is none of them come without trade-offs and costs, all of which require careful consideration.

Let’s say you’re 70; your savings have run out and you’re struggling to get by on NZ Super alone. You own your home mortgage-free and would net a million dollars from selling it. Owning a mortgage-free home makes you more fortunate than many retirees – but that’s cold comfort if you can’t make ends meet.

Some of the options include selling and renting, a reverse equity mortgage, home reversion, and family involvement.

Given the size of this question, I’m going to split analysis of the options over several columns – that said, remember this can only ever be your starting point for your investigations, and fair warning – not all of them may be palatable to you.

Let’s start with selling and renting (remember I did warn they might not all be palatable!) The idea of renting in retirement horrifies some – but it’s one way to flip the asset-rich conundrum on its head.

It gives you a lump sum to invest and releases you from chunky home ownership costs like rates, home insurance and maintenance.

However, it comes with some big ‘buts’. Paying rent, which will increase over time, potentially moving when you don’t want to, fluctuating investment returns and the risk if you don’t manage the funds appropriately, they could run out.

So, how can you work out whether it would leave you in a better or worse position?

As a starting point (because I’d recommend you ultimately seek professional advice) you could try utilising Sorted’s Retirement Navigator tool. I was pleased to see this launched recently, because advice often focuses on saving for retirement, not how to make the money last!

This tool distils the Society of Actuaries’ “Drawdown Rules of Thumb” into an online calculator, to help determine how much you might be able to spend and the probability you’ll run out of money.

The four “rules of thumb” to compare are: spending 6% of your starting balance each year; spending 4% of your balance in the first year then increasing it annually for inflation; spending your savings to last to a specific date; or spending it in line with your life expectancy.

I encourage you to play with it yourself, but let’s apply it to our scenario of being 70 and selling your home for a (net) $1 million and renting. (Apologies, number-heavy paragraphs ahead).

Let’s assume we invest $800,000, keeping $200,000 liquid for emergencies and to fund the next three years.

Using the 6% rule and a “balanced” investment fund, it suggests you could withdraw $48,000 a year (on top of approx. $27,000 NZ Super) and your funds would “almost certainly” last to age 89, and “probably” until 102.

If we assume you’re saving approx. $7000 in rates, insurance and maintenance (which may be conservative!) but now paying $600 a week in rent (average rent in 2025 was $574 per Infometrics, but I’ve rounded up, since a $1m home is above the national average). If all other costs remain equal, you’d be almost $24,000 better off each year.

That sounds compelling – but the spending power of that money will diminish with inflation (although NZ Super is indexed) whereas your rent will rise (often by more than inflation). I’d suggest this “rule of thumb” is best suited to someone who wants to “front load” their spending and perhaps doesn’t intend to leave an inheritance. (It’s also worth noting you could probably afford to invest some of your funds in “growth” rather than solely “balanced” funds – but no return is guaranteed).

Compare that with the “inflated 4% rule”, where you’d withdraw $32,000 in year one, increasing it each year with inflation, and your funds will “probably” last until you’re 110. That suggests you’re likely to be able to leave an inheritance but would receive a lot less each year – and thus only be $7800 better off annually.

This is only a crude example with so many variables to be considered, some of which are known, or can be reasonably substantiated eg what are average rents – while others are a best guess, eg how fast will rents rise (and how long will I live?!)

Depending on your perspective, the emotional cost of losing the security of owning a home may outweigh any financial upside, or it may lift a burden from your shoulders.

But when the savings account is empty, it’s worth assessing whether doing it differently could provide a better outcome – or just peace of mind that you’ve explored your options.

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