Home ownership vs rent-vesting: what the numbers show for retirement
For a growing number of Australians, the first real chance to buy a home doesn't come from a pay rise. It comes from an inheritance, often in their 40s or 50s, long after house prices have moved out of reach.
It raises a big question: do you keep renting and invest the money, or use it to buy a home? Here is how we worked through that question with a couple in exactly this position, and what the numbers showed.
The situation
The couple were in their 40s and 50s, with no dependants and a combined income of around $270,000. They were paying about $50,000 a year in rent. Between cash savings and super, they had around $780,000, including a $350,000 inheritance.
They had been planning to keep renting and invest the surplus, an approach often called rent-vesting. It's a reasonable strategy, and for many people it works well in their earning years. The question we wanted to answer was what it would look like in retirement.
Why we modelled it, not guessed it
We modelled four scenarios side by side: renting and investing, and buying a home, each with and without changes to spending and work. We compared them in today's dollars to age 80, including the value of the home.
Both paths look similar for the first decade. The gap opens up in retirement. By age 80, the renting path was down to around $0.4 million, with rent still to pay. The path that owned a home had around $2.2 million more in net assets, and that includes the home. Why rent matters more in retirement
Two things drive that gap.
Rent doesn't stop when your income does. In your working years, rent is one expense among many. In retirement, it can become the largest cost you can't shrink, and it tends to rise just when your income falls.
The Age Pension favours homeowners. The family home is generally exempt from the Age Pension assets test, so owning a home can help you qualify for more support. A renter's investments are assessed and drawn down. A homeowner's home is typically not assessed, and it can later be downsized or used for its equity.
What the plan involved
Buying the home was the headline decision, but several smaller moves made the plan work.
Using the inheritance as the deposit. We kept a cash buffer after settlement, so they weren't stretched.
Boosting the deposit through super. The First Home Super Saver Scheme lets you save for a first home through super contributions, which are taxed concessionally. For this couple, that was an estimated $6,000 of tax saved in the first year.
Adjusting spending and work. Trimming discretionary spending by around $12,000 a year, together with one partner working until 60, helped their retirement savings last a further 11 years, from age 69 to age 80.
Moving KiwiSaver into Australian super. This is an easy one to overlook. Earnings in Australian super are taxed at up to 15% while you save and are generally tax-free in retirement. KiwiSaver earnings could be taxed at up to 28% for non-residents. Over a long retirement, that difference adds up.
(KiwiSaver tax depends on residency, so it's worth confirming with a New Zealand tax adviser.)
Being protected matters too
Buying a home means taking on a significant loan, and the plan relies on two incomes. So we reviewed their insurance in detail: life, trauma, disability and income protection cover, sized to the new loan. That included around $15,000 a month of income protection to age 65. If illness or injury stopped one of them working, the plan wouldn't unravel.
They also had no wills or powers of attorney. We put both in place, so their wishes are protected and someone they trust can act if needed.
The takeaway
They came to us planning to keep renting. The modelling didn't tell them what to do, but it gave them the clarity to see how each choice would play out over 40 years. They chose ownership.
If you've received an inheritance in your 40s or 50s, you're far from alone, and the decision in front of you deserves more than a rule of thumb. Seeing the full picture, with the home, the tax, the Age Pension and the protection around it, is what turns a hard choice into a confident one.
If you'd like to talk it through, get in touch for a free, no-obligation chat with Source Wealth.
This case study is based on a real client engagement, with details adjusted to protect privacy. Projections are estimates only and not guaranteed. They are in today's dollars, include the value of the home, assume 5% annual home growth, and are shown to age 80. Individual results will vary. This article is general information only and is not personal financial advice. Consider your own circumstances and seek advice before acting.
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