When Prime Minister Lee Hsien Loong listed the various ways in which a “cash poor” senior can get extra income from his/her home in retirement, he said, “It is better if you keep your property. Even if you rent out the whole flat. It does not matter, it is yours. And you can fall back on it for your old age, just in case anything happens.” Here’s why I disagree, and why I think selling then renting is a viable option.
I understand and appreciate where PM is coming from. He’s worried that many people who end up cashing out their property would not be able to appropriately ration their windfall throughout the remainder of their life. This is why he put constraints on taking lump sum withdrawals of one’s CPF.
Additionally, owning a home provides assurance that you will have shelter, which is a basic need.
But selling your property is not always a bad thing. I believe if you are prudent with your windfall money, the option to cash out your property should be a viable consideration, especially for seniors.
So where would the “homeless” seniors live? While some may choose to live with their children, others can become tenants and rent. There are many benefits in renting (you’ll find some listed here). And for a senior, renting can be one of the best options for them.
In the US, many seniors are tenants. In fact, many prefer to rent rather than to own at this stage in their life.
Top 5 Reasons Why Renting Makes Sense for Seniors
1. Selling their existing home and then renting allows them to tap into the equity of their home. This is a more straightforward option for freeing up equity, rather than to take a home equity line of credit or a reverse mortgage. Both of these financial instruments can be complicated for seniors. There are lots of hidden terms and fees in the fine print (that no one reads).
2. If a senior who gets a steady stream of income in retirement (through CPF), budgeting for rent becomes easy. For example, if a person receive $2500 per month from various sources, he/she might want to rent a place that is $1200 a month; and use the surplus for discretionary spending. Many seniors in the US aim to rent a place that is about 60% of their monthly income stream. This stream is often comprised of Social Security payments, annuity payments, other passive income.
3. Seniors often don’t want to deal with maintenance or repairs. Owning a home can be burdensome. Ever hear of the saying
You think you own your home, but it is your home that owns you”?
Homes must be maintained. And if they’re not, they can be huge money-pits. As a homeowner, whenever the air-con, plumbing, or electrical wiring needs to be fixed, you are responsible for it. As a tenant, you just simply contact your landlord and he/she must take care of it.
4. Renting gives seniors more choices of where to live and how to live. In the early retirement years (when physical/mental capability may not be an issue), seniors might want to live closer to grandchildren. Or they might want to be closer to their workplace, if they’re still working. In their later retirement years (when they are less capable), perhaps they want to live with other seniors and hire a helper. They may want to rent a ground level unit. Or one that is nearer to a specific facility or place of interest.
Retirement is not a constant state. And it can last 20 or 30 years. Your needs will change. Renting can give you more flexibility and choices.
5. Owning a home might create estate planning issues. Some seniors may not want to deal with estate planning. There can be a lot of conflicts among heirs, and seniors may wish to avoid possible disputes. By selling their property while they’re still alive, they can choose to divide their leftover cash evenly among their beneficiaries.
Dividing cash is easier than dividing property. For example, a senior may have three sons. If all three inherit equal shares, and they do not want to live together, one will have to buy the other two out. But in many cases, a buyout is not possible because of a lack of money.
Some Questions to Consider
What about keeping your home and renting it out?
One option that PM mentioned was for seniors to keep their property and rent out the rooms or the entire unit. This can also be a good option. But seniors may not want to deal with the burden of being a landlord. Though home ownership is considered an investment, yields on rental property are quite low, especially after factoring in having to pay tax on rental income, agent fees, repairs, cleaning/maintenance fees, insurance, and property tax.
Does owning a home actually guarantee that a senior will have adequate shelter?
Owning a home gives seniors some assurance that they will have adequate shelter. But this is not a guarantee. The home can be taken away due to non-payment of property tax. Additionally, the home may fall into substandard conditions due to deferred maintenance or repairs, or lack of basic services like water and electricity due to non-payment.
If cashing out of one’s home is a good option, why not cash out your CPF (take a lump sum withdrawal)?
Although I believe seniors should consider cashing out of one’s property, I do not believe this is a wise choice for CPF. This is because the CPF earns interest, while the money that is locked up in your home does not. Also, keeping money in CPF diversifies your risk. As a senior, it is good for some of your money liquid or semi-liquid (for emergencies). And it is good for some of your money to be in interest-bearing accounts. CPF is also virtually risk-free, and will not go down in value. Whereas your property can, and likely will (after the bubble pops).
What should a senior do with the windfall from their property?
Seniors can use the money to top up their CPF. To diversify their risk, they might also consider buying an annuity that will guarantee a lifetime payout. They can also contribute to a Supplementary Retirement Scheme.
Of course, it is also good to have some money readily available for emergencies. Often, when an emergency arises, many seniors do not have adequate cash on hand. And then, they are in a rush to sell their assets, often discounted because of urgency.
The purpose of this article is to present some counter-arguments. And to question our culture’s aversion to renting. Since each person has different goals, priorities, and risk tolerances, I would recommend consulting a good financial planner. But above all, I would strongly encourage adopting a frugal lifestyle so that you will stretch your dollars and make them last, no matter what your yields on investments are.