Should You Use Your Retirement Savings to Buy a Home?
If you’ve nearly saved enough for the down payment, how much do you need for all the additional costs that come with buying a home? And is cutting your pension contributions worth the short term? Here’s what we’re thinking this week.
Every Monday, we address one of your pressing personal finance questions by seeking advice from several financial experts. If you have a general question or money issue, or just want to talk about something PeFi-related, leave it in the comments or email me at alicia.adamczyk@lifehacker.com.
Will asks the question this week:
My husband and I are finally going to buy a house in a year or 18 months. The area we want to buy is * just * starting to move, so we don’t want to wait too long for it to become as inaccessible as everything else around.
Despite the fact that we have a sufficient (almost) down payment, I want to make sure that we have enough cash for all the little things, as well as for life in general. We are currently contributing a relatively high 12 percent to 401 (k). Is it a good idea to temporarily reduce these fees for a year or so to fund your bank account to buy a home? (Of course we wouldn’t go below employer percentage!)
This is what individual experts usually say about a problem that affects each person differently: if you need personalized advice, you should see a financial planner.
Define your financial priorities
Congratulations, you’ve taken the next big step! It looks like you’ve thought it over and are leaning towards cutting your pension contributions. There is nothing wrong with that – it is better than digging into credit card debt, for example, because you missed some expenses and you do not have enough liquid assets to cover them. But let’s go over all the options to be sure.
Clearly, you know how to make sacrifices – saving for a down payment while continuing to deposit double-digit amounts into retirement accounts is an impressive feat. LearnVest founder Alexa von Tobel says that if you’re looking for a specific number to hit a specific number before you start redirecting funds to a home, “in general, people should be on track to replace 70-85 percent of their pre-retirement income with retirement. before they start postponing the down payment. “
However, in the end you don’t have much money and only you know what your priorities are. So if buying a home is your dream come true and will bring you more satisfaction than retiring a year or two earlier, this is something to consider. Likewise, you can increase your savings in the next year or so after you get things settled with your home.
“Yes, it’s okay to cut the 401 (k) contribution temporarily to achieve a worthwhile goal. Buying your first home is a worthwhile goal. So make sure you have a rainy day savings to pay for unavoidable home renovations and other homeownership costs, plus, as you say, “life in general,” says Holden Lewis, home expert at Nerdwallet . “In the end, when you know you can afford it, you can return to your previous level of retirement savings. In the meantime, you are right to contribute enough funds to meet the employer’s requirements. “
On the other hand, if you are in doubt about buying a home or need to significantly cut your retirement savings in order to accumulate enough, try cutting other extraneous expenses while continuing to contribute to your retirement accounts for several months. Place these discounts in a separate high-income savings account for the home buying process and build your security system that way.
Instead of focusing on an arbitrary shopping schedule, focus on gradually building up your emergency fund in a way that doesn’t create unnecessary stress for you and your husband. After all, there is no “right” time to shop. It may take a little longer, but you will be better off – both in the short term and after retirement.
How much do you need to set aside? Of course, this will depend on where you live, the size of the mortgage, and a million other variables that you cannot foresee. But according to CNN Money , homebuyers typically incur unexpected costs of between $ 2,000 and $ 5,000. So include that in your budget and see if there is flexibility beyond the 12 percent you save for retirement. You are in a good place in terms of retirement savings – would you like to stay there?
If this is too difficult to do, you can reduce your pension contributions. “Remember that saving for retirement is not your primary goal; Your main goal is to live a great life together, ”says Lewis. “A wonderful life for you is having a home and then not worrying about bills. Achieve this goal with enthusiasm, and then you can return to saving for retirement. “