Title: The 401(k) Dilemma: Balancing Retirement and Short-Term Goals
Introduction:
Saving for retirement while simultaneously working towards other significant milestones, such as purchasing a house, presents individuals with a financial dilemma. Many people wonder if it would be prudent to contribute less to their 401(k) plans to save up for a large purchase. This article aims to explore the factors individuals should consider when making this decision and provide insight into establishing a balanced approach.
1. Understanding the Importance of Retirement Savings:
The first step in addressing this dilemma is acknowledging the critical role retirement savings play in securing a comfortable future. Contributing to a 401(k) enables individuals to benefit from the power of compounding over time, while also enjoying potential employer contributions and tax advantages. Therefore, it is crucial to keep retirement planning at the forefront of financial decision-making. Cutting back on contributions may lead to significant long-term repercussions, as retirement funds are designed to grow steadily over several decades.
2. Assessing Your Short and Long-Term Financial Goals:
Next, it is essential to evaluate both short-term aspirations, such as purchasing a house, and long-term goals, like a financially stable retirement. Creating a comprehensive financial plan that prioritizes these objectives will help you determine the appropriate balance between the two. Utilizing tools like financial calculators can aid in determining the impact of adjusting contributions on retirement savings, allowing you to make an informed decision.
3. Evaluating Life Stage and Age:
One’s life stage and age play a significant role in determining the right contribution strategy. Younger individuals have the advantage of time, as their retirement plans have more decades to grow. In this case, diverting a fraction of contributions towards a house may seem more feasible, as their retirement funds can still rebound. However, older individuals need to exercise caution, as time becomes more limited. For those approaching retirement, reducing 401(k) contributions may not be advisable, as the gains can be challenging to recover within a shorter timeframe.
4. Considering Housing Market Dynamics:
Understanding the dynamics of the housing market is essential when contemplating this decision. Researching trends in your desired location, studying mortgage rates, and analyzing the stability of real estate prices can provide valuable insights. If the market indicates that waiting a few more years may result in higher home prices, it may be tempting to prioritize saving for a down payment. However, long-term retirement planning should factor in potential appreciation of real estate investments as well.
5. Weighing the Trade-Offs:
To make an informed decision, it is crucial to compare the potential trade-offs. By contributing less to a 401(k) to save for a home, you may face increased risk in retirement. Additionally, you might miss out on employer matching contributions, which are essentially free money. Conversely, saving aggressively for a house may require a more extended timeline for retirement or compromises on other financial goals, such as education funding, starting a business, or emergency savings. Weighing each aspect will help you understand the potential impacts and prioritize accordingly.
6. Mapping Out an Integrated Strategy:
Rather than opting for an all-or-nothing approach, an integrated strategy can offer a balanced solution. Instead of significantly reducing 401(k) contributions, consider pursuing both objectives simultaneously. Identify areas in your budget where you may be able to make adjustments to free up additional funds for savings, whether it be cutting back on discretionary spending, reducing housing expenses, or boosting income through side hustles. This approach allows you to tackle short-term goals while continuing to contribute to retirement funds, albeit at a slightly lower percentage.
7. Alternative Financing Options:
If purchasing a home is the primary reason for reducing 401(k) contributions, exploring alternative financing options can be beneficial. Programs like first-time homebuyer loans, Federal Housing Administration (FHA) loans, or traditional mortgages with lower down payment requirements can aid in pursuing homeownership without sacrificing retirement savings. Consulting with a financial advisor and mortgage specialist can help assess these options and identify the most suitable path.
Conclusion:
The decision to contribute less to a 401(k) to save for a large purchase like a house requires careful consideration of several factors. While it may seem logical to redirect funds towards short-term goals, one must acknowledge the long-term implications on retirement savings. Striking a balance between these objectives through comprehensive financial planning, budget adjustments, alternative financing options, and evaluation of market dynamics will help individuals make informed decisions that align with their unique situations. Ultimately, it is crucial to prioritize retirement without completely disregarding other significant milestones, ensuring a comfortable, stable future.
Adult life is all about figuring out how to weigh trade offs. How to allocate scarce resources. Understanding that prioritizing one thing means giving up another.
What are you looking to change your retirement contributions to?
How will this impact your retirement goals/plans?
How important is this house to you?
How important is this house to your parents?
Are you looking to achieve the house goal because you wish to satisfy your parents? Or do you actually truly understand what home ownership entails and wish to have a house?
How much house are you looking for?
How much down payment will you need to achieve this house? (This sets your house down payment goal and makes it an actual discrete and real number)
The balancing act between funding retirement and paying for a house is something that many people struggle with. My bias is towards retirement – everyone needs to retire but not everyone needs to buy a house.
> I don’t know that I have any plans to settle down any time soon, even though my parents are urging me to buy a condo (single, single income, HCOL area) sooner rather than later – as in, within the next two years.
Not everyone will agree with me on this, but I don’t think young single people should buy houses.
There are two main reasons for this. First, you should remain flexible it’s not out of the question that you could get an amazing job offer halfway across the country that requires you to move. (Or a long distance relationship that you decide to move for.)
Second, it is very common when you meet your spouse that the two of you will want to buy a house together. It’s almost guaranteed that the condo you buy now will not be sufficient for marriage and a family. So why jump into the purchase now? Plus, you’ll have the advantage of two spouses’ buying power instead of just one.
IMO for as long as you’re maxing out your Roth IRA, reducing your 401k contribution down to the match amount (3%) sounds okay to me. There’s no law that says you’re only allowed to retire on your 401k and no other assets.
You also have a long time until you retire so there’s plenty of opportunity to catch up on your contributions as needed.
The only thing I’d be wary of is that you’ll need a larger emergency fund when you’re a homeowner. Major home repairs can be very expensive – we’re talking 5 figures here. Given current interest rates, can you fit a mortgage payment, property tax, insurance and HOA fees (condos can have extremely high HOA fees) into your current budget?
I would also avoid any highrise condos if at all possible. It’s not super common but if any issues come up with the building (e.g. repairs that need to be done, structural stuff) it’s extremely expensive to repair and they’ll always do an assessment on the homeowners.
Your parents are urging you, but what do you want to do? Are they urging because you live with them? If that’s the case, buying isn’t the only option – you could always rent for awhile.
To answer your question, it really is personal preference. If you’re uncertain about buying in the short term, just keep plugging away with what you’re currently doing, and you’ll still be building funds for a down payment later on. If you do actually want to buy and it’s more of a sure thing, then there’s nothing wrong with holding back other savings to fund your down payment. *You* just need to be okay with the opportunity cost of foregoing future savings for a near term purchase. It’s a balancing act that isn’t easy and there usually isn’t a clear cut answer.
Yes, if you are saving for a house you should lower your contributions until you can afford it. Otherwise you are going to take a much longer time until you can buy it. Always make sure to take the match though
at times I see real estate as a more sure investment than the stock market. But I don’t consider renting as “throwing your money away” – as a younger person it affords you a ton of flexibility. Owning a house full of crap significantly hinders my ability to up and move to a more lucrative place, or even easily reduce my commute.
It’s probably fine in your case to reduce your 401k contribution as long as you’re still getting the maximum match.
Of course it could make sense. Managing your finances is all about tradeoffs. Reversing the question, does it ever make sense to forgo present opportunities to save the most money for retirement? You have to make the best decision for your own financial goals and lifestyle choices.
It makes sense to lower your contribution to buy a house. It would not make sense to do it for a car or a wedding.
> I don’t know that I have any plans to settle down any time soon, even though my parents are urging me to buy a condo (single, single income, HCOL area) sooner rather than later – as in within the next two years.
My opinion is: if you are young and single, don’t buy a house unless you have a clear and specific reason to. However…
> I would like to have fairly easy/quick access to a large sum of money in case something pops up.
I think this is a perfectly legitimate reason to divert some funds to a HYSA, treasuries, or a CD if you could see yourself buying a house in the next few years.
**Worth noting:** a Roth IRA can help you here as well. It allows you to withdraw your *contributions* at any time without penalty, as long as your Roth account meets the [5 year rule](https://www.investopedia.com/ask/answers/05/waitingperiodroth.asp) (you’ve owned the Roth with money in it for at least 5 years). This lets you use the Roth as a [long-term savings vehicle](https://momanddadmoney.com/roth-ira-ultimate-savings-account/) for large, nebulous, once-in-a-lifetime purchases: a first house, college tuition, etc. Or if none of those things happen, just use it for retirement like intended.
There are some caveats: you should maintain other retirement savings like a 401k (which you do), and the 5-year rule plus the yearly contribution limit means that you will need more lead time to build up the savings. There are also the usual risks that come with investing. The upside is that you can keep the money invested in the market and earning tax-free, but it can easily be repurposed if your goals change later in life.
Not sure who manages your 401k but some providers will allow you to withdraw up to half your savings for a first time home purchase. The withdrawal is a “loan” to yourself, all interest you pay back will also go into your 401k
I did that. I kind of hit a point in the last few years where I would rather have a bit extra money now to enjoy than save as much as possible for retirement. Gotta enjoy life getting to that point or whats the point.
The simple answer is no. But life is complex.
Nope never. Get a second job, work overtime, etc before you decrease that 401k amount
IRAs have some provisions for first time home buyers. I contribute more knowing I’ll use it down the line for that probably.
Yes absolutely. Everyone’s situation is different.
If you need a house for your family, you should lower contributions to save for a down payment. Especially in a higher interest market.
How much house are you trying to buy? $40k in a savings account for a 26 YO is a lot of money imo so you’re off to a great start.
Your financial plan is shaped by your financial goals. If your goals are concrete, then the plan is essentially a math problem with some probability thrown in.
If you want to buy a house or make some other purchase, but you aren’t currently funding enough for it, then you’ll either have to make more money, or you’ll have to pull the money from elsewhere.
To go a bit extreme, if you are saving 70% of your income for retirement (with any extra money is put invested into a non-retirement account), then reducing that and putting it towards a home would make more sense. If you have 30% then it probably makes sense. 15% it makes some sense, though some people may be uncertain. 8% maybe yes, maybe no. 4%, maybe you’ve reached a lower bound and you shouldn’t pull any money away. To put it this way, there is some theoretical maximum that is way overcontributing and can obviously be reduced, and also a minimum where you wouldn’t want to go below. It’s all about finding the middle ground.
The main question to ask is “with my current goals, am I overcontributing to retirement?”, or alternatively, “what is the lowest contribution I can make that will meet my goal to have a good retirement as well as buy a house?”.
There are some people here who believe you should always be maxing out all your retirement accounts, but that’s not realistic for most incomes and is essentially people that their only financial goal should be retirement.
With that said, it’s always good to evaluate your goal and figure out if it is what you really want and what the opportunity costs are. Again, the solution to achieve your goals is mostly math, it’s more about what your goals are than anything else.
Just gotta do the math yourself. Fire up Excel, make a column for each scenario, and see which one leaves you with more money down the line.
In general though my instinct is if you can’t afford the down payment without pausing 401k, then don’t do it. You don’t “deserve” a house, you “can afford” a house, and there’s no race for when that happens.
It only makes sense if you actually have a near-term timeline on buying a house/condo. If it’s going to sit there for the next 10 years then no.
I would not change your 401 contributions. But find other things to skimpy on. Like eating out, going out to bars, ect.
You could always save some of this house money in a Roth IRA – your contributions to a Roth are tax and penalty free, for any reason. Obv read up on the fine print but there isn’t much.
If you really wanted to, I believe you can actually withdraw from some retirement accounts penalty free specifically for your first home purchase. So as long as you do your hw and are willing to accept some of the risk of investing, you can purposefully put the home savings money into ak eligible retirement account, that allows you to withdraw for that purpose when it’s time. Don’t withdraw too much obv but if you keep your numbers straight, this might be a best of both worlds approach.
Start another hysa with a tiny bit from your existing one specifically for your future down payment.
You don’t even know when you’ll buy a home. Now is definitely not a good time.
401k loan for homebuyers
Add more and take a loan against it
https://www.investopedia.com/ask/answers/081815/can-i-take-my-401k-buy-house.asp
It depends on how much money your parents are willing and able to contribute to the down payment, and how much you feel comfortable with them giving you. If they provide the entire down payment, then there is no need to reduce your retirement savings. Btw there is no shame in accepting their help – sometimes parents reach a point where they have more money than they need, and they get huge satisfaction out of passing along some of it while they are still around to see the benefits.
I personally would not. Savings is paying max about 5% right now. Your 401 will pay more but it’s the compound interest that you will be loosing. That really adds up.
There’s nothing wrong with renting until your lifestyle requires you yo buy. https://jlcollinsnh.com/2023/03/02/why-your-house-is-a-terrible-investment/
If you’re looking to buy a home in 2-3 years I’d continue to invest, but use the Roth IRA. Your contributions can be withdrawn without penalty or repayment. If you’re are thinking of purchase a home within the next year than yeah stick to the safer route of a HYSA.
You can withdraw up to $10,000 to buy a house without penalty from your 401K. You do pay taxes on it the year you take it out, so if you are getting a good return on your 401k, keep putting money in until you have enough to make that withdrawal.
quick and dirty answer is yes. contributes to 401k to the match no question- save everything else for 20% down payment – resume 401k after you are settle in.
it would be foolish to say ” i only put 5% down because was putting too much into my 401k”
this is just temporary plan with intent.
Absolutely 100% yes. There is nothing wrong with cutting down on retirement contributions to save for the things in life that truly matter, like a first home. I’d still say you should at least max the match though.
Yes this is a common decision to make once you are looking at real estate.
No. You can borrow from your 401(k), and most lenders won’t factor this into your DTI or consider it debt, because it’s to yourself. It is honestly the best of both worlds; you get to make a tax deferred return while you’re waiting to buy, and when you borrow it, the opportunity cost is lower, as you’re only *losing* the difference between your theoretical market return, and the actual interest rate you’re paying yourself.
If it’s your first house, you can use money from your 401(k) to help pay for it without a penalty.
How in the f*** do you have 100k saved up by 26 AND paid off all your student loans. What am I doing wrong
There are many financial decisions that have to be made with imperfect information or even insufficient information, but one incredible asset you have is the long time ahead of you to recover from financial mistakes or decisions that didn’t pan out as hoped.
I’m not sure I’d want to buy right now, but temporarily reducing your unmatched 401(k) savings to keep a little more cash available so you’ll have options probably won’t hurt you much.
I would urge you to buy real estate too. For me it’s a huge part of retirement plan. Most people focus on how much savings they have for retirement. I think it’s equally important to consider expenses and the biggest one is rent/mortgage. If you buy real estate now on a 30 year mortgage, it won’t be paid off until you’re 56 years old (faster if you make biweekly payments or add a little extra to principle). At that point you’ll have even more disposable income to live life or invest.
When/if you get married (never know how life is going to go, I thought I would be married around 27-29, but now I’m 39 and still single), you can use that as a starter home or sell it and use the equity in a 1031 tax exchange to upgrade to a bigger property. If you want to move, you can rent it out as rents will consistently go up over time with property values.
>I don’t know that I have any plans to settle down any time soon
You’re 26. If you’re not ready for a house, don’t get one. Stick to 401k/Roth/HYSA for now, and build your future. When you’re ready to settle down, you’ll know. There is no reason to rush with interest rates what they are right now. Just keep your money invested and wait for the opportune moment.
You can take a loan from your 401k for the house down payment. Are you getting a higher return with the 401k or HYSA?
I never did because my 403B contributions aren’t taken until I pend the money. They come very close to paying for themselves.
You appear to make good money. Not sure if you’re renting right now.
If a mortgage is similar to rent with 0-5% down plus taxes, insurance, fees, etc. I’d buy now or soon.
Prices aren’t going to and have not dropped that much, this isn’t the same as the Great Recession. I could see prices falling in areas due to foreclosures, as I feel many lost all/most self control for finances since 2020. Compound that with recent inflation and fuel prices. It makes for at least a small storm of price movement. Institutional buyers are waiting for this to happen. I’m sure the money is burning a hole in their pockets.
I feel that prices will start going up again when the Fed drops rates a few times over the next 5? years. I have no idea when, 5 is a guess, but it’ll happen eventually.
I would avoid a condo if at all possible. You can’t deduct the HOA/condo fees, the interest rate is higher, and their appreciation has historically lagged behind townhomes and houses.
Bro frankly for 26 you’ve saved a retarded amount of money for retirement, massive kudos to you. I would take 20k from HYSA and the entire home savings and pull the trigger. Your profound savings leads me to believe you’re a planner and maybe anxious about the future. Tomorrow is never promised.
You don’t want to be renting when you retired. So ya, I would try to save for down payment.
You have 100k, mom and dad are paying you to figure it out, it’s your last legal year on their insurance.
Honey babe, it’s time to become a grown up, and figure it up.
You should thank them, and yourself for the phenomenal head start you have.
Continue to rent if you aren’t ready to buy, but for the love of christ read the room.
When I bought my house in 2016 I was making enough to max my 401k but couldn’t afford the house and to max my contributions. I chose to pull back on the contributions a bit to buy the home. Now 7 years later the few k I “lost” in retirement savings is nothing compared to what I saved by buying cheaper and at lower rates than today.
As others have said it’s all a trade based on your goals. Personally I prioritized a home sooner over slightly more in retirement.
Honestly, its a tough call. I’m in the same situation as you and trying to figure out how much to put in my 401k right now. Growing up, my parents drilled into my head that owning a house was the ultimate financial goal. I’m 27 with 140k in cash (all in VTI), and about 55k across 401k and Roth IRA.
I’m still living with parents, my goal was to jump straight from home to living in my own property but prices in my area shot up and I’m outpriced for at least 5 more years (HCOL area where normal homes are 800k-1.5M)
On one hand, increasing my 401k is the fastest way to increase my net worth via less taxes but I also don’t want to live with my parents or lose 30-40% of my paycheck to a landlord forever
Its a tough call, I know that everyone suggests to max out retirement but I personally think its dumb to leave 60-70% of your NW just for retirement, you don’t know how long you’ll live or be healthy for, imo whatever decision you make, as long as you’re maxing out your Roth IRA and contributing match or 10% every single year, you’ll end up fine for retirement, definitely already better off than the vast majority of americans, you ever want to feel good, look up “median 401k balance by age”
Oh and btw I recommend putting some of your HYSA into index funds, there’s no guarantee but the stock market tends out to outgrow house prices, if you own stocks, you’ll eventually own a home, at least that’s what I would do if I was close to buying but not comfortable enough yet
There is no way my wife and I could have saved 300k in 5 years to even come close to what we gained in buying our condo back then. So definitely pull back, and if it makes sense to and you can afford to, put down 3.5-5% and get into a place. Saving 20% to put down on a first time buys is definitely very difficult. Your rate of savings is never gonna match the equity rate, for the most part.
Ours didn’t living in south orange county CA.
A perspective from a young home owner. I bought a single-family house at 23 with my boyfriend (fiance now). I believe owning a home is the greatest feeling ever. However if you have never lived in an apartment complex before, or had upstairs neighbors, i would HIGHLY advice AGAINST buying a condo – look for a townhome instead. Also remember you are probnably locked in that location for a few years, at the minimum. Because if you find out you hate having upstairs neighbors, you better be willing to find a new place to live and sell/rent it out which comes with additional hassle. Also factor in furniture, renovation, basic supplies needed, utilities etc.