How Renters Can Save for Retirement—Without Owning a House

While buying real estate has long been valued as a smart way to build wealth and pave the way to retirement, many people—especially those living in big cities such as New York, Chicago, and San Francisco—spend their entire lives as renters.

For this urban set, homeownership isn’t a reasonable option due to exorbitant city property prices. Nonetheless, these individuals still need to save for retirement, too.

“Every day in America, 11,000 baby boomers will retire, and shockingly, many of them will outlive their retirement savings,” says Robert Ramirez, a professor of business and faculty chair at DeVry University/Keller Graduate School of Management and author of “Achieving Financial Freedom.” “Money is important whether you own a home or rent, because the future is unpredictable.”

While renters might seem to be at a disadvantage for saving since they “throw away” their money on rent, they have the edge over homeowners in a variety of surprising ways. Here are a few reasons why renting can trump buying a home when it comes to saving for retirement, and some renter-friendly tips for supersizing that nest egg.

Renting can be cheaper than buying a home—by a lot

One misconception that many people might have is that being a homeowner is always financially wiser to renting.

However, according to the Realtor.com July 2024 Rental Report, renting is now cheaper than buying a first home by an average of $1,067 per month.

In major cities, the savings are even higher. For example, New York City renters save $2,342 per month by renting over buying. In San Francisco, renters save $2,442 per month. In Boston, the average is $2,336 per month. That’s a healthy chunk of change that can potentially be reallocated toward retirement.

“Renting lets you reside in these regions without paying high sales prices, which really may not be worth it if you’re not going to stay longer than seven years,” says Ramirez.

Why seven years? Ramirez says that’s the average time it takes for home price appreciation and equity accumulation to recoup the costs of real estate agent commissions, closing, and capital gains taxes that come with homebuying and selling transactions.

Plus, early mortgage payments for homeowners are mostly interest. Equity (the amount you actually own in your home) takes years to establish.

According to the Realtor.com mortgage calculator, homebuyers purchasing a home with a 20% down payment at the latest median price of $439,950 and a 30-year fixed interest rate of 6.4% would end up owing $792,551 in interest over the life of the loan.

During that same amount of time, renters could instead save the money they would spend on interest and funnel that toward retirement.

Renting has lower upfront costs than buying

“Renting can often come with lower upfront costs compared to buying a home, such as not needing a large down payment or paying for property taxes—and this lower upfront cost can free up more of your income to be allocated toward retirement savings,” says real estate agent Michael Crute, founder of a new Renters’ Rewards Program with Welcome Home Atlanta, which gives renters money back for paying their rent on time.

“Buying a home requires a 20% down payment, closing charges, property taxes, homeowners insurance, and maybe mortgage insurance,” adds Ramirez. “Instead, renting involves a security deposit and the first and last months’ rent, which is much lower.”

In other words, lifelong renters will not have to pay all the steep initial fees that go along with homeownership. As such, they have the opportunity for more potential liquidity.

Instead of saving every month for a down payment, Crute says that renters who plan to stay renters would be smart to allocate a certain amount of their income to other investment vehicles, such as IRAs, 401(k)s, or diversified investment portfolios, which might offer better returns over time than a house.

Renting has lower maintenance costs

Another thing to keep in mind is that homeownership comes with expenses that renters never have to pay.

“When you rent, your landlord is generally responsible for property taxes, mortgage insurance, homeowners association fees, property maintenance, and repairs, saving you time and money from the homeowner’s headaches,” says Ramirez. “Renters usually avoid these fees, saving them thousands of dollars per month.”

For example: Lawn care, repairs, and preventive maintenance might cost homeowners 1% to 3% of their home’s worth annually, Ramirez says. For example, a $300,000 home might cost $250 to $750 each month.

Plus, property taxes normally hover around 0.5% to 2% of the home’s value, though that varies by location. Still, for a $300,000 home, that might cost $125 to $500 each month.

And depending on the location and features, HOA costs can be $100 to $1,000 per month in communities with shared amenities. Depending on the property and region, Ramirez estimates that homeowners might spend $650 to $2,925 monthly on these fees, which renters can save instead.

Renting means you can move for the right job

Another advantage renting has over owning is that if a fantastic job opportunity crops up elsewhere, there’s little holding you back from moving there quickly.

“Renting allows you to change jobs, or relocate to a new place without the constraints of property ownership,” says Ramirez.

This can be particularly helpful in today’s ever-mobile world, which includes the expansion of remote work or digital nomad lifestyles.

Job opportunities aside, “Renting provides flexibility to move to more affordable areas or downsize more easily as your financial needs change,” says Crute. “This can potentially reduce living expenses and allow more savings to be directed toward retirement.”

Renting allows for rent increase negotiations

While a mortgage with a fixed rate might be set in stone, renters may benefit from variable rent rates.

However, there is also risk. As the housing supply continues to shrink, the cost of housing can drastically increase for renters since management companies increase rates on a supply-demand economic cycle. As such, Crute suggests trying to negotiate rent increases upfront if you’re willing to stay put.

“Some landlords may be willing to lock in a rate or agree to minimal increases for reliable, long-term tenants,” Crute says.

Start the conversation with your landlord by expressing your intent to rent long term and mention the desire for financial predictability.

“A multiyear term is more favorable to landlords because it gives them more peace of mind surrounding predictable finances and maintenance costs as well as reduces the capital expenses they incur to restore the property for new tenants,” says Crute. “Propose a fixed rental rate or a gradual increase plan that works for both of you, allowing you to save the difference each month.”

Tips to help renters save for retirement

So, contrary to popular opinion, you can see how it’s possible to save money for retirement as a lifelong renter. In fact, you might even be able to save more than someone who buys a house.

“By renting strategically and managing savings and investments wisely, individuals can potentially grow their retirement funds without the financial commitments and risks associated with homeownership,” says Crute.

But there’s a catch: You have to be diligent about putting the money away and not spending it on extra dinners out, vacations, or fancy shoes. Instead of caving to “economic leakage” (spending on things you don’t really need), you’ve got to have renters’ retirement fund discipline.

“It’s easy to get caught up in the now, but every dollar you save today rather than spend on nonessentials is a step toward a more secure and better future,” says Ramirez. “The earlier you begin, the more manageable it becomes over time.”

One great way to get started is by using the Realtor.com Rent vs. Buy Calculator. Comparing the costs of renting versus buying allows you to discover how much money you can save as a renter.

“Then, you can take the difference and sock it aside for retirement,” says Ramirez. “This method helps you turn what may appear to be a short-term saving into a long-term investment in your financial future, ensuring you’re establishing a solid nest egg even if you don’t own any property.”

Here are a few ways you can use the money you aren’t investing in a home to help put you on the path to a stronger retirement:

• Create a forced savings plan for yourself. Homeowners are “forced” to save for retirement with their mortgage serving as the means for future wealth accumulation. Renters can replicate this kind of “forced savings” by setting up automatic deposits into a retirement fund each month. “While renting, take advantage of employer-matched 401(k) and investment accounts to accelerate your savings plan,” says Crute. “Many companies will match 3% to 6% of your contributions, which can significantly boost your savings over time.”
• Build an emergency fund. Save three to six months of living expenses. After you’ve met this goal, you should aim to save at least 15% of your income into a retirement account. Budgeting can help you do this. Ramirez also suggests setting SMART (specific, measurable, achievable, realistic, and time-bound) financial objectives. “By creating SMART goals, you can break down your retirement saving target into manageable steps so you don’t run out of money in your old age,” says Ramirez.
• Purchase long-term care insurance. “As a lifelong renter, you won’t have the equity of a home to fall back on for long-term care,” says Ramirez. “By purchasing long-term care insurance, it can protect your assets and help provide for your retirement needs.” Long-term care insurance is crucial because it covers costs not covered by health insurance, Medicare, or Medicaid, such as daily assistance if you can’t care for yourself. Not all LTCI plans are alike. Look for policies with inflation protection, a wide choice of care options (home care, assisted living, etc.), and a strong financial rating from independent agencies to make a good investment.
• Invest your renters’ savings wisely. Ramirez suggests diversifying your investments in a mix of stocks, bonds, and other assets to lower your risk and maximize your portfolio. As an example, if you calculate that renting is saving you $500 a month, and in turn invest that amount in a diverse portfolio with a 7% yearly return (a typical stock market average), you could get a nice return in 10 years. For example, a 7% annual return on $500 monthly investments over 10 years equals $86,752.

The bottom line is that saving as a lifelong renter is possible, but you must prioritize your future comfort as part of your budget.

“Retirement savings assure you can pay rent and keep a roof over your head no matter what life throws at you,” says Ramirez. “You can secure yourself today and tomorrow by investing in your retirement, not only real estate.”