Does renting in retirement make sense? In some cases it does. In others it does not. However, from a purely financial standpoint, I think it does. But of course no financial decisions devoid of emotional value. So why does renting make sense?
Well for example a $300k home, would allow the owners assuming they pay cash for closing a $300k nest egg. Sure, they could live there and pay approximately $3k/year maintenance, $1500/year insurance, $3k/year insurance. So monthly they would be paying about $625. However there is lost opportunity cost on the $300k sitting in home equity. Assuming a very conservative 6%, that is $18k/year or $1500/month. So in actuality owning a home is costing the homeowners $2125/month.
But why sell? Well let's assume they invest the $300k in a Bond index fund. And only harvest 4%/year leaving 2-4% reinvested annually. They'd still have $1k/month to rent with. Now assuming they could rent a 2 bd/2ba apartment for that they'd come out ahead. But you're moving from a single family home to an apartment!
Well the truth is as you age, you will become unable to do home repairs yourself. You will rely more on hired help. It will be harder to mow the grass, weed, paint, repair shingles, etc. Things you might have done yourself a decade ago. So your maintenance costs on your house might easily double. Especially if you haven't been properly maintaining the house for 30 years and left a lot of it deferred. Hence it won't just cost you $625/month, it could be more like $1500/month to live in a house.
When you rent, as an elderly person you don't have to worry if the sink breaks, toilet floods, etc. You call the landlord and they deal with it. As an owner, you have to afford these repairs. So renting can make sense, especially for people who are disabled and unable to do any projects themselves.
But $1k/month isn't enough to live on. Well then why not harvest 8%? Assuming you invest it in a balanced fund at Vanguard getting 8% returns isn't hard. This would allow$2k of expenses month. Could you rent a place for that much? Likely yes.
The problem is the attachement people have to their home. It doesn't actually make financial sense to own as we age. Also if you forced into a care home/nursing facility, it's a lot easier to move out of a rented apartment versus trying to sell an ancient home.
As I write this, I think about how I'm still trying to convince my parents to stop taking our mortgages and buying home at 56 and 76. They have bought into this notion that real estate is wealth. When the truth is they are spending more buying than if they would just rent.
But growing older I wonder if we aren't more stuck in our ways due to habit rather than looking at the best financial options?