Klauster Properties Ltd - Tenant’s Blog

Rent vs Buy In New Zealand

Rent-or-Buy: Renting for life time takes the retirement on risk if you don’t plan related costs for rent increases, medical care, transportation and more. Considering the impact of overvalued properties, hire-purchases and inflation - how much money do you need to retire on?

Is Retirement a Risk for Life-Time Renters?

 

In the media you can read everything about unaffordable housing and the consequences in retirement. True or not—people have to live somewhere and renting is for many the only option. The likelihood of changes in future is slim as you know due to inflation. I still have records from paying 62c/litre petrol in 1997 but paid  $2.12/litre at SHELL yesterday. With housing it is similar. Steady price increases put retirements on risk.

 

Why do some people save for a home and others not?

 

Regardless of whether you agree with what the media say or not about overvalued properties and home affordability, the bottom line is home owners and renters pay for the comfort of living in a house anyway.

 

But what happens when the income drops to a minimum due retirement? For many people is that one reason to buy a family home and pay off the mortgage as part of a retirement plan.

In other words homeowners are committed for years to save hard and make sacrifices for the reason to manage costs when retired.

 

 

How much do life-time renters need for a safe retirement?

 

The number of life-time renters has increased recent statistics revealed. That is neither new nor impressive news as we know that the quality of rentals has also improved and people prefer renting for many different reasons.

 

The other day I had a chat with a good renter (mid 30s, works in IT, she does part-time office work because of two kids) and asked him the question—when do you stop renting? I got three significant answers;

· Why should I buy this house, when renting is much cheaper?

· Why should I care, when paying a landlord to fix it? and

· My next job-offer will possibly be in Sydney—why would I limit my income potential when rooting here?

 

Three good reasons for renters—right?

 

But still there is one important question open when your career ends, and that happens to all of us—have you saved enough for your retirement?

 

Obviously people don’t like to be forced to have the discipline for paying a mortgage. That is interesting because I can observe the same type of people are happy to pay for higher interest rates on hire-purchase.

I also deal with renters who can’t park the brand new Holden Commodore inside the garage, because of a number of surfboards, mountain bikes, diving gear and lots of other toys. 

Coming back to my remaining question

 

How much money do you need to retire?

 

Let me assume you plan to retire on a budget of 50k annually. Divided by 12 months you need approximately $4100 minus the financial support you would get (let me say $1100). Still  before tax you need to subsidize your lifestyle by $3000 monthly (36k per annum) for rent, medical care, transport, communication, etc— are you with me?

 

By 36k a year (3k multiplied by 12 months) estimated for 20 years you would need a financial buffer of 720k of savings. In comparison with that amount of savings a mortgage free home owner would have paid slightly more on his home loan. Saying—you as renter need also a similar amount of money to retire on comfortably  - can you see that? 

 

What age do you need to start saving for your retirement?

 

Latest with the age of 65, if you want to keep your lifestyle, you will need around 700k or more. Home owners went in their prime age through a saving marathon, but how many renters are able to save that money on income? If so, you need an investment plan (stocks, term-investments, funds, etc).

 

Depending on your income - how much can you save? If you save $2000 per month, that is similar to home owner’s  mortgage payments, you will still need 30 years to secure your lifestyle. If you are smart, then you’ll do that in your prime earning years.

 

Starting with 50 or later there will not be much time left for saving and you as renter have to abandon your lifestyle. The grasshopper story illustrates the situation nicely.

 

Consider this— when renting a home for life-time the costs for higher rents, mobility (car and communication) and health service are the major expenses restricting the freedom of enjoying life— DO something before getting trapped.

Good luck

Klauster