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 advance.
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 factors.
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 this?
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.
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.
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.
Mike
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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."
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.
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 $3k.
Crude estimate of emergency expenses: Future mortgage of about $1000/month ($160k loan at about 6% interest) 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 month.
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 on this.
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 investing plan)
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.
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.
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. JOE
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 results.
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 happen.
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 change)
What's the alternative to saving for retirement? There is none.
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,
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 one basket.
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