Retirees need pots of gold to cover rent

susan.edmunds@stuff.co.nz

If you are planning on being a lifelong renter, here’s a reality check.

To live in median-priced rental accommodation through your retirement, without extra government assistance, you would need to save the sort of money that it might have cost you to buy a house anyway.

Calculations from variable annuity provider Lifetime show that it would require an investment of $500,000 at 65 to provide enough weekly income from then on to cover the country’s median weekly rent of $420.

This is an income for life – you don’t have to guess how long you will live. It also assumes that the initial lump sum is being drawn down, supplemented by investment returns.

A couple could split that amount between them. They would then be left to live on the pension, of $400 after tax per week for a single person living alone, or $308 each for a couple.

ASB chief economist Nick Tuffley said it was inescapable that retirees needed a ‘‘fair degree’’ of money in either case, whether it was to purchase a house outright before retirement, or to pay rent.

‘‘On top of that you have to save more to cover your living expenses.’’

But although home ownership reduced the ‘‘operating costs’’ of providing housing and improved cashflow, there were still associated costs such as ongoing maintenance, rates and insurance. ‘‘That can add up to quite a bit.’’

Many older people were asset rich and cash poor, he said, which could also be an issue.

‘‘Renting might not necessarily prove to be a bad option. The thing is, if people are consciously making the decision, ‘I’m going to rent all my life,’ they do need to make sure they are putting aside money over and above the rent they were paying,’’ Tuffley said.

Economist Mieke Welvaert, of Infometrics, said someone with $500,000 in savings might decide that it was better to buy a house at that point.

‘‘Probably not in Auckland but you’d be able to get a nice spot in several other parts of the country for $500,000.’’

Welvaert said homeowners were compelled to put money away through their lives in a way that tenants were not.

‘‘Paying off a mortgage can also be considered a way to force yourself to save for retirement. Aside from KiwiSaver, no-one really makes you save for retirement but a bank will get you to pay your mortgage.’’

Homeowners who paid off the debt could then downsize and realise some of the value.

Her colleague, Gareth Kiernan, said the ability to leverage capital gains from mortgage debt was an ‘‘extremely compelling’’ reason for buying.

‘‘Assuming mortgage rates don’t change, you’re effectively fixing your accommodation costs at today’s prices when you buy a house, whereas rents will keep going up,’’ Kiernan said.

‘‘If you pay the mortgage off before retirement, then your accommodation costs effectively move to be close to zero.

‘‘The orthodox economic view is that people should be indifferent between various types of investment, but that’s never going to happen in New Zealand – even if we tax rental properties more thoroughly, the family home is a sacred cow.’’

He said people who were lifelong renters were probably poorer and could not afford to save a deposit.

Some banks might be unwilling to lend if they worried they might not service the debt, he said.

‘‘So if these people are then going to be worse off in retirement because they have to keep paying rent, we’re effectively locking a subsection of society into relative poverty.’’