Last week, I read with great interest this article from Get Rich Slowly (the comments, too!). Author April questioned which should come first: Getting a house or funding your retirement?
She explained her plan and reasoning and then her new approach.
I thought I’d talk a little about my own situation.
Shane and I are 24 years old. We have 35 years until Shane can tap his retirement account without penalty. We’re renting an apartment and will continue to rent until 2011 or longer.
At this time, we are saving for both retirement and for a down payment on a house.
We’re sending about 9 percent of Shane’s gross pay to his Roth 401 (k). There used to be a generous company match, but they’ve taken it away entirely. The company has hinted that they may reinstate it, but we aren’t keeping our fingers crossed.
Our long-term plan is to bump up the retirement contributions to at least 15 percent of his gross pay, regardless of company match.
We’re also aggressively saving money so that we can afford to buy a house.
We’re putting anywhere between 22 to 31 percent of his gross pay straight into the house fund.
Since there’s no free money on the table, we could stop our retirement savings for now, and put all of that into the house fund. It would add a significant amount to our down payment, and maybe even be enough so that we could put a full 20 percent down, thereby avoiding costly PMI.
There are 35 years until we can touch the retirement accounts. Since that’s 11 more years than we’ve been alive, that feels like a really long time to us. Thirty-five years is a long time for compound interest to do amazing things with our money.
In that vein, we think it’s worth it to keep on saving for retirement.
Also, diverting retirement funds into our house fund would not put us into a house faster.
When we decide how much house we can afford (and I do mean we — not the mortgage lender!), we’ll be sure to save room in our monthly budget to increase our retirement savings and for our son’s college. We haven’t yet started Johnny’s college fund.
I do realize that some people live in markets where, despite their best efforts, it will take years and years to save enough for a house. Depending on how old those folks are, and how important having a house is to them, it might be better to cut back on retirement savings a bit to put more toward the house fund.
Even in that situation, I think it’s worth it to put at least a little bit toward retirement. And if there’s a company match, put enough to get all that free money.
What’s your take on this? House vs. retirement?