Retirement Savings: Why You’ll Need To Save $690 More Every Month If You Rent Your Home
Written by
Hanna Horvath
Edited by
Daria Uhlig
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Saving for retirement is a challenge for anyone, but renters face a unique obstacle — not having equity built up in a home they can sell for a lump sum when they retire. That equity, or lack thereof, makes a significant difference in terms of wealth. Whereas the average renter’s net worth is just $6,300, the average homeowner is worth $255,000, according to the Federal Reserve Board’s most recent Survey of Consumer Finances.
That’s why you may need to stow away even more for retirement if you want to maintain your lifestyle in your golden years — $248,700 more, or an average of $690 per month over 30 years, to catch up to the average homeowner.
Why Renters Need To Save More
Renting puts tenants at a financial disadvantage in several ways.
Rent Doesn’t Go Away in Retirement
Well over half of homeowners retire mortgage-free, according to TIAA, leaving just property tax and homeowners insurance to pay monthly. “Homeownership ties itself to retirement by dramatically lowering your bills while you’re retired,” said Brian Kuhn, Certified Financial Planner at Wealth Enhancement Group.
Renters, on the other hand, can’t “pay off” their rent.
Rent is Unpredictable
Most mortgages come with a fixed interest rate, so the payment is the same for the entire term of the loan.
That’s not the reality for renters.
Rent prices typically rise over time, often outpacing inflation. While how much you pay depends on where you live, the national average rental cost has risen over 20% since 2019, according to a December 2023 Rent.Research report.
Renters Must Be More Deliberate About Saving
Many homeowners use their mortgage payments as a forced savings vehicle. Their principal payments and the home’s appreciation over time build equity that automatically provides a nest egg for the homeowner.
Rent payments, on the other hand, don’t go towards building any equity, so renters need to consciously save extra money instead.
Renting Does Have Its Benefits
The news for renters isn’t all bad.
Unlike homeowners, for example, you won’t have to worry about home maintenance, repairs, insurance or property taxes, all of which drive up housing costs — and in the case of maintenance and repairs, can also be unpredictable.
“When you own a home, your mortgage payment is the least you have to pay, while when you rent, it is the most you will pay,” said Jay Zigmont, Certified Financial Planner and founder of Childfree Wealth.
Renters also avoid being tied down.
“The bonus with renting is that you can move at any time. Having flexibility in where you live can give you more options, like moving to a better climate or to a low-tax state.”
How Much Do You Need To Save for Retirement?
Financial experts recommend that you have about 10 times your final salary saved by age 67. Keep in mind that this is just a benchmark, and you should adjust that number based on your specific situation.
Fortunately, you’ll probably spend less in retirement than you do now.
“Many households find that not having to save for retirement, having the kids reach independence and paying off their debt reduces their expenses dramatically as they enter retirement,” Kuhn said.
However, rent will continue to be an important part of your budget.
“If you have been a long-term renter, you … should have a good idea of how much rent has gone up over the years, and that should be part of your plan,” Zigmont said.
Tips for Increasing Your Savings
A good rule of thumb is to max out your 401(k)s and IRAs before investing in a taxable brokerage account. Retirement accounts use the power of compounding to grow tax-free. Starting to save early with repeated contributions can help you grow your money faster over time.
Also consider setting up automatic transfers and saving windfalls like tax refunds and bonuses to maximize your savings. Even minor lifestyle cutbacks to reduce costs can lead to extra money that can be invested in your nest egg.
Building long-term wealth is more challenging for renters, but not impossible with the right plan. Saving aggressively and anticipating future costs can help ensure your golden years are comfortable, even if you still have to pay rent.
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