I am in the process of saving for a 20% down payment for a home that I'd
like to purchase in about 1-2 years. I'm currently 28, earning 75K a year.
I've tried to maximize my 401K contributions and Roth IRA as much as
possible, but in doing so, I'm not able to save as quickly for the down
payment as I'd like. What is the best strategy for how I should save for
down payment without fully neglecting retirement savings. For now, I've
scaled back my retirement contributions so as to get the company match, but
don't know if that's the best strategy (i.e. should I contribute more or
just focus all the remaining savings towards my down payment?). Thanks in
Life is about decisions and trade offs. Cutting the 401k down to the
match to save for a house is a good method/ good trade off.
At age 28, you still have 40 years of compounding in retirement
accounts until you retire, and maybe 70 years of compounding until you
move on. Both of these are long enough time periods that not
maximizing 401k right now is not a huge impact.
The comment above also might change depending on age, how much is
invested, how much you planned to save for the first house, and other
While I understand your point-of-view, I have to disagree. I think
saving 20% down for a house given today's interest rates is far less
important than saving for retirement. And given the 40/70 years of
compounding you mention, neglecting savings today will have a massive
impact in retirement for the OP.
william dot trice at ngc dot com
I see this idea ("at retirement we'll downsize and convert much of the
home equity to income production") fairly common among younger people
under 50. However I begin to see changes once we get to middle-agers.
Here's a recent example. A couple (mid-50s) were discussing
retirement with me. The husband was in the process of explaining how
the projected income shortfall at age 60 would be eliminated by
downsizing their home and creating more income-producing money.
At that point the wife interrupted, saying something very similar to
the following: "Just who do you plan to live with in your smaller,
less expensive house? It won't be me because I'll be living in my
beautiful home where I raised my babies and where my grandchildren
will come to visit me."
-HW "Skip" Weldon
Whether one chooses to live in the house bought young, or to downsize,
shelter will be needed at retirement. I think the sentiment expressed was
that a home purchase means prepaid shelter, especially if one reaches
retirement with no mortgage.
Today, you can rent and have a place to live. It's a
perfectly viable alternative to homeownership. At
the moment, it's far less risky too. (but that may
What's the alternative to saving for retirement?
There is none.
I gotta agree 100% with Will.
No argument there.
What we don't know is (a) how much he's saved so far, (b) how much in $
and % he's trying to save in the 401(k)(he did say he's backed down to
just get the match, but what %/$ is that?) and IRA.
Also - he did imply a $200K home. That $160K mortgage would barely cost
him $11,000/yr in payments ($3k tax?) or 20% of his gross. That's as
conservative as it gets. Didn't see anyone suggest going 15yr as the
payments would only go up about $4K, and he'd own it outright by 43.
Knowing these numbers, you might still go either way. I'm no forecaster
(actually, sgt, you've proven yourself to be a good one), but buying
based on where we are in the cycle, both in terms of rates, the 30 yr
should see the low 5% range, and panic selling in the housing market, we
may be near the optimum time to be a buyer. That exact time may be now,
6 months from now or a year, I'm not sure.
As jIM implied at the end of his response, more information
would yield more specific guidance. For example, I would
like to know whether you have health insurance; an emergency
fund of say 12 months of living expenses; your monthly
budget laid out on a spreadsheet so you know whether you can
move dollars from some other expenditure besides your 401(k)
and Roth IRA; how much you need to save to get to a 20%
downpayment; whether you have considered how much a house
costs each month; any debts (credit card, auto, other?); are
marriage and kids in the future and have you planned for
As jIM suggested, contributing only up to the match for
one's 401(k) is a very prudent way to go, regardless of
whether one is saving for a house or something else. Beyond
the match, taxable accounts often are more advantageous, due
to the frequently (but not always) high expenses of choices
in a 401(k).
Also, for the immediate future, keep contributing the max
(if possible) to your Roth IRA. You can always take the
contribution part (but not earnings part) out of the Roth at
any time, penalty and tax free. If you think you may want to
draw from the Roth to pay for the downpayment, then invest
the Roth IRA's contents in conservative, short term CDs or
money markets. No stocks, period, if you intend to draw on
the investment in less than say ten years.
Hi Thanks for the response.
To answer your questions. Yes, I have health insurance through my employer.
As far as an emergency fund, I don't specifically have. I mean, I have 33K
in savings right now. My goal was to have about 53K total in about 1 - 1
1/2 years and put at max 40K for a down payment leaving me with 13K for some
wiggle room. The only debt I currently have is a car loan at about $2700
that should be paid off in less than a year. Marriage, well, I'm not really
near that place yet, though who knows where I might be in 5-10 years with
respect to that as I'm already 28. Though, honestly, right now, I don't
even have kids / marriage at all in my equation since I"m not even with
anyone right now.
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What is the interest rate on the car loan? If you can pay
cash towards the principal and so save on interest, then pay
it off now from savings. This reduces your savings by about
Crude estimate of emergency expenses:
Future mortgage of about $1000/month ($160k loan at about 6%
Property taxes of about $150/month
Utilities, food, etc. another $850/month (on the cheap)
So have around $15k in an emergency fund to cover around six
months of expenses, should you lose your job. Alternatively,
think of it as your "I need a new roof, car, furnace" etc.
fund. Note the rough numbers. You should lay all this out on
a spreadsheet and refine.
So set aside $3k for the car and $15k for your emergency
fund. This leaves you with 33k -18k = $15k to go towards
your house downpayment, at present. You need $25k more for
the downpayment of $40k. Your timeframe is 1-2 years. Save
about $2100 a month for one year. Or save about $1100 a
month for two years.
You make $75k a year. After taxes and benefit deductions,
figure take home of around $58k a year. (I work with someone
who makes about $75k a year, so I have some feel for the
numbers here.) A 401(k) match up to 6% of pay is common for
your situation, so figure about $4500 a year goes into the
401(k) for the match. Put $5k a year in the Roth IRA. So you
have about $48k a year to spend on housing, food, clothes,
car, recreation, and saving for a downpayment. That's $4k a
Unless you are living in very expensive apartment right now
or have extravagant tastes, it seems to me you could have
your downpayment saved within a year while continuing to
save a lot for retirement.
You should try very hard to keep stuffing much money in your
tax advantaged retirement plans while you are young and
able. The compounding effect of starting savings early is
spectacular. It's hard (mathematically unrealistic) to make
up later. Plus no telling how long these tax advantaged
plans will be an option for you, since your income will
rise, and some restrictions start kicking in.
Two more cents of advice: Consider planning for marriage at
some point. No man/woman is an island. It's more fun to
spend money (carefully) together. Make sure she's on the
same page, re saving. Listen to the 55 and older people here
FWIW, I'm in the "max out retirement plans first" camp.
As someone else (Elle?) said, at least get the 401k match and
then max out what you put into a Roth. If you can,
max out the rest of the 401k, too, but having maxed
out the Roth, if you do decide to use some of your
retirement savings for a house down payment, you can
pull Roth contributions back out without penalty.
I'd still encourage you *not* to do so. These days,
with no pensions and SS very unlikely to pay you
enough to live comfortably on (though still very
likely to pay you a little bit), I strongly believe
in saving for retirement first and let one of your
best assets - *time* - work hardest for you.
Think about what "no emergency fund" implies when you have a
mortgage and a house you can't just move out of if you lose
your job and can't afford it your mortgage payments. (There
are alternatives you may think of as an emergency fund -
ie. a home equity line or pulling Roth contributions out -
but both of those really are unfortunate ways out of that -
one puts your house even further at risk and the other
has a hugely disproportionate impact on your long-term
All I can say is really - many folks buy way more house than
they can afford (witness the current disasters!). Save more,
and plan on less house (certainly less house than the
banks may think you can afford - even now with the
tighter lending standards than a year ago, they are
still willing to lend folks way more than, in my
opinion, folks usually ought to ever borrow).
There are some myths still floating around out there about
homeownership. Houses do *not* make you rich. They get
you a place to live with generally relatively fixed,
predictable costs, but with huge transaction costs if
you need to move, and huge illiquidity for your capital
if you need it for other things. Both upside and downside.
They also often lead folks to have very *undiversified*
asset/investments - inasmuch as many folks have most of
their wealth tied up in a single local real estate market.
Houses do usually go up in value (usually - not always),
and the power of leverage (borrowing most of the money
at the lowest interest rates you're likely to ever borrow
at in your life) do help make them do well long-term, but
not nearly as well as the myths seem to suggest.
That all said, I love owning my house. But I waited until
I was in my mid-thirties, and never ever ever missed the
opportunity to max out retirement plans first. Once you
can save as much out of retirement plans as you save inside
retirement plans - which may mean living a little cheaper
in the meantime - then you are accumulating wealth which
can very safely (note the "very" - this is a conservative
plan) use that non-retirement money towards a house.
Again, speaking from personal experience, you may be
surprised at how fast that can come. The best thing
you can do for your marriage, even if it doesn't happen
for 10 years, is to come into it from a very strong
and safe financial position. You'll feel a hell of
a lot better about having kids, you'll have vastly
less stress, and your marriage is vastly more likely
to succeed - finances are the single biggest cause
of marital conflict, and with some planning and care,
it just doesn't have to be that way.
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! -- http://www.expita.com/nomime.html
The prudent thing is to try to live on 85% of your after-tax
income, save and invest the rest. Employ tax advantages
such as retirement savings, capital gains and home-buying
when you can. Most of these tax-incentives were created
or only became available in 1990s. So they didnt factor in
as much in the savings decisions of people born before 1970
as those born after.
If by maximize, you mean $15,500 in the 401(k) and $4000 Roth, that's a
large percentage of your income. If, after buying the house, you are
able to save 15% (plus the match), you'll quickly catch up.
You may consider keeping the high 401(k) deposits, and using a loan from
the 401(k) when you buy the house. That loan will have a reasonable rate
going back to the account, and a 10 year payback. Hindsight tell me that
for most periods this is a better choice than any short term/cash option
within the 401(k). The risk is that if you lose your job, the loan must
be paid, but it's just one option you may consider.
I don't believe anyone has mentioned the following plan, which is
fairly common in areas where I have lived and owned property. You buy a
triplex (three unit apartment building) and live in the smallest unit.
You rent the other two units to tenants. After expenses, the rental
income from the two units comes close to paying the mortgage on the
property, depending of course on lnterest rates at the time and the
size of your down payment. Five years or so down the road, if you
acquire a larger family, you knock out one wall and make your unit
larger, but still get rental income from the remaining unit. If you
have to move to another city because of your job, you turn it back into
a triplex and get rental income from all three units until you decide
what to do next. If possible, get a new house in the new city and keep
the triplex for good! Over the years that triplex generate enough
income to pay the mortgage and will probably appreciate in value a
whole lot. If you are frugal, you can do all this and still maximize
your 401 contributions and Roth IRA. Maybe this plan is not for
everybody, but I have seen a lot of people do it, including friends and
family members, many with excellent results and none with disastrous
said:> Maybe this plan is not for everybody, but I have seen a lot of
An oft-mentioned example in the property tax debate here in Florida is
the Cuban immigrant who took that approach to fund their retirement.
Increased property taxes make it now a losing proposition. Their
assets are tied up with nothing left to live on.
As I said, it's used as an example in support of a particular
political position, so probably is not representative. But it can
Yes, it is foolish to have all one's assets in real estate and to
neglect tax advantaged retirement plans. It is equally foolish to have
everyting in the stock market and nothing in home equity. And the most
insane idea of all is for elderly people with substantial equity in
their homes to take out home equity loans and invest in the stock
market during a period when stocks are all the rage. Where I live that
idea was once played up a lot, and a lot of people got burned. I am not
aware of a single case where that strartegy actually paid off, and I am
aware of some cases where people lost their homes. Diversification
among asset classes is just as important as diversification among
companies in stock investment, if not more so. Put not all thy eggs in
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