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Saving for a House vs. Saving for Retirement


SUMMARY: When deciding how to manage your finances, is it better to put more funds toward retirement or homeownership? Follow these guidelines to help determine what’s best for you.

Of the many competing priorities in your financial life, retirement and homeownership are likely both in the mix. The former often feels like a destination far off in the future, while the latter feels like a more immediate, necessary need.

This dilemma is common among millennials, who often put homeownership and debt repayment first and are willing to dial down retirement savings to achieve these goals. So when the time comes to start a family (or simply move out of that cramped studio above the fish market), how do you choose where to put your savings? Do you even have to choose?

saving for a house

Play the long game

There are long-term benefits to both home and retirement savings. The more time your money has to stew in a 401(k) or IRA, the more benefits you get from compound interest. Any funds you set aside for a down payment are funds you won’t have come retirement.

But a home can be a useful retirement investment in and of itself. The IRS considers it a special asset and that carries certain benefits. If you file jointly with your spouse, you can exclude as much as $500,000 in gains from income taxes when you sell your house ($250,000 for an individual). Invest these gains back into the market and the value of your home continues to work for you.

Start with an emergency fund

Whether you put your money in the markets or your home, the first place to start is an emergency fund. If you lose your job or your car dies on the side of the road, you’ll need a cushion of at least three to six months worth of salary to see you through that period of uncertainty. Otherwise, your credit cards will bear the burden and you’ll end up paying more in interest down the road.

Split your income

Sit down and take a hard look at where every dollar goes. See what discretionary spending you can trim. Do you really need all those streaming services? Can you eat out once a month instead of twice? As soon as you’ve cut back on these extras, take the remaining cash and divide it up between necessary monthly expenses (food, rent, utilities) and future savings. A little pain now will provide a lot of gain later.

Juggle a bit

If you can keep your retirement savings at current levels and also make your down payment, great. But that’s a tall order for many households. If this sounds like you, it’s OK to briefly press pause on retirement savings to focus on buying a home, as long as you jump right back in when the deed and keys are in hand.

Keep in mind that any break in long-term savings now will require you to put in more later to keep pace with your expected retirement income. You’ll also lose out on compound interest for that period.

One tool that may prove useful here is a Roth IRA. You contribute with after-tax dollars and therefore pay nothing when you withdraw. As a first-time home buyer, you can draw earnings as well as contributions without taxes or penalties. Again, any money taken out will need to be replenished. There are, of course, many opinions on this option and much fine print to consider.

Shrink the down payment

Although the typical down payment on a home is 20 percent, there are many first-time home-buying loans that ask only 3-5 percent. You will likely have to pay private mortgage insurance (PMI) until you hit 20 percent, but you’ll be far less likely to dip into your emergency fund or postpone debt repayment. It also keeps the bulk of your money invested and earning compound interest.

Look beyond the mortgage

After the down payment, your mortgage will be the single biggest consistent expense on your home, but it’s not the only one. Regular maintenance, unexpected repairs and taxes are all ongoing costs that continue long after you pay off the mortgage. You’ll need to factor this into your overall financial plan for such a purchase. Doing otherwise could leave you “house poor” without a lot of wiggle room to ramp up retirement savings or pay for other expenses.

Tap the experts

So, how should you allocate savings between home and retirement? As with all financial questions, it depends. If you’re confident in your ability to catch up with contributions, put money toward that house. If your resources only allow you to focus on one goal, maybe you can pay rent for a little while longer.

TDECU’s wealth advisors are ready to help bring clarity to your finances and lay out options. Check out our free e-book, Your Complete Road Map to Retirement, for a first look at these and other common questions.

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