Oct 28 2009

Saving for house, retirement or both

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.

But.

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?



6 Responses to “Saving for house, retirement or both”

  1. I just have to say… I think taxes are CRAZY expensive where you live! Sheesh.

    We bought a house two years ago. We bought what we thought we could afford (and thank God we can!) but we also kept saving for retirement. Living in an apartment was driving me crazy (I grew up with plenty of land and horses, etc) so the peace of mind with buying a house was worth it to us.

    At any rate, I think you guys are doing great. :)
    .-= Mrs. Money´s last blog ..A $90 pair of socks?! =-.

  2. I think you need to define your goals as much as possible. If your goal is to retire at age 59 1/2, when you can touch the 401k funds, then look at your contribution level and make sure you’re saving enough to comfortably retire at that age. Any “extra” money can be put towards the house fund – but don’t stop saving for retirement! :-)

    We want to semi-retire as soon as possible (cut back to part-time or volunteer work, but not pull from retiremement funds), and a big part of that goal is paying off our home. Each month we our recommended amount in retirement savings. Everything else gets shoveled into the mortgage.

    It would be SOO easy to stop contributing to our retirement, but then what happens in “X” years when the house is paid off (or in your case, you have a downpayment for the house)? Oops, you’ve met one goal but are that much farther from having a comfortable retirement. You’ll have to work even harder to make up for lost time.

    A side note: If you’re contributing to a Roth IRA (and why not, there’s no 401k match), you can pull contributions for the purchase of a first home. It’s not ideal, but you would have the benefit of investment returns and compounding interest until you pull the funds. Of course if the market tumbles before you buy the house, you’ll be in trouble. But it might be a way to compromise in your situation – tuck extra money into the Roth, and it’s there “just in case” you need a small boost to not need PMI.

  3. We are doing both right now. We actually have already bought a house (well, the bank bought the house). If I had to do it over again, I would have not been in such a hurry and waited until we had 20%. It really stinks paying PMI right now. It’s basically a penalty for not saving enough! Our goal right now is to finish paying off my husband’s student loans (we’ve got about $6,500 left. woo hoo!), and then we’re going to start shoveling that money into our mortgage to try to get to 20% as quickly as possible. After that, we attack my loans.

    Since we are also young (29) we are pretty aggressively saving for retirement. Now’s the very best time. We can always back off a little bit later if we need to, and it won’t sting as bad. Any money we can put in now has a really long time to grow. We are very used to just not having that money to play with, so we really don’t miss it. And we’ll thank ourselves when it is time to retire!
    .-= Tiffany´s last blog ..On Going Back to Work =-.

  4. I recommend that everyone do something to fund their retirement even if it’s just $50 a month. Having a house is important, but one cannot underestimate the power of compound interest over time.
    .-= Ken´s last blog ..My Goals for Money Making Sense Blog =-.

  5. We went with house, unexpectedly, when a great opportunity came up for us to get some state assistance for first-time homebuyers under a certain income (basically $60,000 in free-ish money), plus the current tax credit. I can see the sense to both sides of the argument, but I think sometimes it’s an individual decision. We were pretty anti-house before this opportunity came up, but we realized that there is a financial power that comes from not renting long-term; that said, I don’t think of renting as “throwing money away” if it’s the best option for someone’s particular life situation.

    The stupidest comment I heard on this issue, when we were trying to decide whether or not to tap into our Roth IRAs to contribute to the down payment (as I said, we had been anti-house, so all our long-term savings had gone into IRAs), was someone who said to stop contributing to IRAs for a couple years to save up the money for a down payment but not take it out of the IRAs — as if that was any different, logically. I think, in some ways, saving in an IRA can make the most sense, because you can pull it out penalty-free for a first-time down payment if needed, but if not — compound interest and retirement, woohoo!
    .-= Lauren @ Hobo Mama´s last blog ..AP Principle #8: Balance and how you can’t do it all, at least not all at once =-.

  6. @Lauren — Sounds like you made a great decision! I agree, it’s important to take each individual circumstance into consideration. It would be pretty hard to turn down that much assistance.

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Hey! I'm Kacie, wife to Shane and mother to Jonathan (7), Vivienne (5) and Amelia (2) . I write about my family's finance: how we save money, improve our spending, and plan for the future.

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