#401k #mortgage #homeownership #financialplanning #retirementsavings
Is it a horrible idea to temporarily stop putting money in my 401k so that I can afford a mortgage? 🏡💰 This is a common dilemma for many individuals who are eager to become homeowners but also want to continue saving for their retirement. In this article, we will explore the pros and cons of pausing 401k contributions in order to afford a mortgage, and provide valuable insights to help you make an informed decision.
## The Importance of Retirement Savings
Before we delve into the question at hand, let’s first acknowledge the significance of prioritizing your 401k contributions. Here are a few key reasons why your retirement savings should be a top priority:
– Compound Interest: By consistently contributing to your 401k, you are allowing your money to grow through the power of compound interest, which can significantly boost your retirement nest egg over time.
– Employer Match: If your company matches a portion of your 401k contributions, you are essentially receiving free money that can bolster your long-term financial security.
– Tax Benefits: Contributions to a traditional 401k are made on a pre-tax basis, which can lower your current tax liability and increase your overall savings.
## Evaluating the Decision
Now that we’ve established the importance of retirement savings, let’s consider the implications of temporarily halting 401k contributions in order to afford a mortgage. Here are some factors to take into account:
### Short-Term Gain vs. Long-Term Impact
– While pausing 401k contributions may provide immediate financial relief for securing a larger mortgage, it’s crucial to weigh this decision against the long-term impact on your retirement savings. Consider the potential growth you could be sacrificing by interrupting your contributions.
### Opportunity Cost
– By forgoing your employer’s matching contributions, you are essentially leaving free money on the table. It’s essential to evaluate the opportunity cost of missing out on this added financial benefit.
### Mortgage Affordability
– Take a close look at your budget and determine if you can comfortably afford your desired mortgage without sacrificing your retirement savings. It’s important to strike a balance between homeownership aspirations and long-term financial security.
### Housing Market Trends
– Consider the current housing market trends in your region and assess whether the urgency to purchase a home aligns with sound financial decision-making. While rising housing costs may create a sense of urgency, it’s crucial to approach this major financial commitment with a clear and rational mindset.
### Financial Flexibility
– Explore alternative strategies to make homeownership more feasible without compromising your retirement savings. This could include negotiating a lower purchase price, exploring different mortgage options, or adjusting your savings and investment strategy.
## Making a Strategic Decision
After carefully evaluating the various considerations, it’s time to make a strategic decision that aligns with your financial goals. Here are some practical steps to help guide your decision-making process:
1. **Financial Planning Consultation**: Consider seeking guidance from a financial planner who can provide personalized insights and help you navigate the trade-offs between homeownership and retirement savings.
2. **Budget Analysis**: Review your current budget to identify potential areas where you can optimize your finances to afford a mortgage without depleting your retirement savings.
3. **Mortgage Affordability Calculation**: Use online resources or consult with a mortgage lender to calculate the maximum mortgage you can comfortably afford without compromising your long-term financial well-being.
4. **Long-Term Goals Assessment**: Revisit your long-term financial goals and assess the impact of pausing 401k contributions on your retirement timeline and desired lifestyle in the future.
5. **Retirement Saving Strategies**: Explore alternative retirement savings strategies, such as contributing to a traditional or Roth IRA, to supplement your 401k savings while still being able to afford a mortgage.
In conclusion, the decision to temporarily stop putting money in your 401k in order to afford a mortgage is complex and requires careful consideration of both short-term and long-term implications. By weighing the trade-offs and consulting with financial experts, you can make an informed decision that aligns with your financial goals and aspirations. Remember that homeownership is a significant milestone, but it should not come at the expense of jeopardizing your retirement security.
If you have to stop investing in your 401k to get the mortgage, you cannot afford the mortgage. Homes are NOT investments. They are homes.
I wouldn’t drop it to zero – but I have played with my contribution over the years to offset changes in life.
Have you ran a side-by-side comparison on what you’d be doing by changing percentages? Easy to do in excel and see what you could be “leaving on the table”.
Define “temporarily”? Mortgages last 15-30 years, that’s not temporary!
Your belief about housing costs is just a belief. There’s nothing special about buying now. Your 401k investment are very likely to grow faster than home prices, so if we just look at this from investment POV, 401k is a much better place for $$.
It’s ok to reduce (but not eliminate) 401k contributions to save for short term goals. That could mean saving for a bigger down payment. But if you just want more cash flow to fund massive mortgage payments, that’s not a short term goal, and that’s a huge mistake. It means you want more house than you can afford.
> My company matches any contribution 80%
Would you confirm what this means for me?
Like, it means:
* You put in 23000
* Employer puts 18400
Do I have that correct?
If so, it’s a pretty amazing match.
Personally, if that was the case, I *would not* give up this degree of “free money.” Rarely in life is there anything where you get this degree of return in such a short amount of time.
I would give up home ownership goal in the short term in exchange for (likely) longer term wealth.
How much higher is a theoretical mortgage payment compared to what you would be comfortable paying without changing your 401k contribution? If it’s a non-negligible difference, do you have an active plan on how to make up that difference with either a clearly defined route to higher pay or any increase in side income?
80% match to any contribution is insane. I get a 50% match up to 3% (so essentially 1.5%). I would do so many degrading things to get 80% up to anything.
Mortgages last much longer than temporary. If you are never able to invest again until your mortgage is paid off, that puts you at 45-60 years old starting investing in your retirement again. You’d then have to work another couple decades to be able to retire.
Don’t get sucked into FOMO. Real-estate is an American religion. https://jlcollinsnh.com/2023/03/02/why-your-house-is-a-terrible-investment/
You already know the answer.
> maybe this urgency is driving bad decision making
Your post has a lot of wants, and by your own admission you are desperate. That is a very dangerous combination.
By not contributing to your 401k, you are effectively borrowing from your future self at *extremely* high interest rates.
You cannot afford the mortgage if it means not contributing at least 15% of your income to retirement.
Sometimes we don’t get what we want. Or we have to wait longer to get it. Keep saving up for an even larger down payment, and buy something when you can afford it and it makes sense for your situation.
If the only way you can afford the payment is to stop saving for retirement entirely, then you cannot afford this mortgage payment.
“My company matches any contribution 80%, it’s an incredible program”
That’s really awesome.
Normally “maximize the match” is my recommendation, but in this case you’d have to put 23k in. I’m curious to read what others recommend here. I think I’d insist on continuing to put in some amount, but maybe lower it temporarily to 8%-12%.
I’d avoid counting on mortgages dropping significantly. If it does, that’s great, but I don’t think you can make that assumption.
I think it’s okay to pause 401k for a year or two to save for a down payment, but not to afford the monthly payment.
The difference is that one has a short, defined timeline and the other is 30 years where you’re betting on raises to make the numbers work.
Just my personal preference, I don’t count any money that I put back for savings/retirement, be it 401k or other investments, as “income”. If/when I’m looking at a new expense, loan, etc… I factor affordability based on my take home, after investments, not before.
>My company matches any contribution 80%
I would max this out… it is a 18k/yr benefit you are giving up.
At 80% unlimited match that’s nuts. There’s no way a house is gonna appreciate as much as 80% on day 1
There is no way any investment will beat an immediate 80% return on investment from that 401k.
That’s fucking insane. Where do you work? I think even the big tech companies “only” match 50% and even then that is absurd number.
I would not do it. Instead, I would look for a house that works within the constraints of your current budget and keep your 401k contributions. Often time as a single person it is difficult to find a property that is appropriately sized. You might be able to find a duplex or property with a small accessory dwelling unit that allows you to generate rental income without sharing space. You may have to drop your 401(k) contributions when the rental space is empty, but be able to afford everything when it is rented.
Alternatively, looking at homes that could easily have a private suite with its own entrance, so that you could have a roommate with minimal shared space could also work.
If it was only for a few months in order to save up for a down payment, I would say yes go for it (I did just that for 6 months and then ramped it back up right after closing) but it sounds like this is to be able to afford the monthly mortgage payment? In that case, no because it’s a recurring payment that you’re needing to decrease contributions for.
No, because it sounds like you’d be putting yourself where you’d have little to no wiggle room
Yes, it is a horrible idea. Your future you will not be pleased if you do this. Envy is the thief of joy. You don’t need to spend a whole bunch of money on a new house now. Take the free money with your awesome match.
Most companies will allow you to take a loan out of your 401k to pay for a down payment. I don’t remember the exact limit, but it’s half of whatever is in your 401k up to a certain amount. – I think 50k out (half of 100k in). This will not count as a loan against you during the financing process.
The trade off is money will come out of your checks to repay the loan + interest to your 401k.
As an example, when I did it I withdrew 9k from my 401k as a loan. My company gives me 10 years to repay it for a home or 5 years for a personal loan, so they take 60ish bucks out of each paycheck to pay it back.
You need to see if that much more down will lower the monthly mortgage enough for you to afford it. In my case I just needed the cash for part of the down payment and closing costs because I bought earlier than expected to lock in a 1.875% rate on the loan. It made sense for me at the time, but with today’s rates I don’t think it would make as much sense.
It also sounds like you might need to compromise on location and size. Find an up and coming suburb 20-30 minutes from work and you’ll see prices much more reasonable.
The only way I would consider this is if your goal was to get roommates to get your mortgage payment covered or well below what you are paying in rent. This would allow you to pause 401k contribution for a few months while you find good roommates. I would not pause that 401k to the point that you couldn’t max it by the end of the year.
Personally, I don’t think it’s a good idea. You specially don’t want to stop any matching funds that is essentially free money so whatever that cap is on the free funds perhaps you pull back a bit to that point.
You’ve saved significantly. If you stopped investing right now your account could probably grow to a million dollars by the time you are 60. I would pull back to maybe 10-20% of your gross going to retirement then reassess if you can have a reasonable mortgage after thats factored in.
What’s going to change that only makes it temporary? If you can’t afford the mortgage payment today, why will you be able to in the future? And how far into the future?
ANY contribution 80%? With no limit?
If so, yes – you’d be crazy. Because in order for the house to do better, it would have to immediately appreciate 80%
Now, assuming there is a cap – you should AT last contribute to get the maximum match.
Sometimes, the answer that will make you happy isn’t the one that is the most technically “correct” financial choice. There’s a lot more to life than just finishing with the largest bank account. What value will owning the home you want (vs. a starter home) add to your life? If you buy now, you could have no mortgage by the time you’re 61, thus living on much less income with a fully paid off house. Are you going to regret living in a paid off house that you love if it means you have less disposable funds in retirement?
If this were me, I’d probably give up (or drastically reduce) the 401K for a year or two until interest rates allow me to refinance to a lower mortgage and start contributing again. If you can even put $100/month into the 401k that’s better than nothing – so maybe you can cut out some other expenses so you can keep contributing a little.
You’ll drive yourself crazy if you try to run the math and find out what the exact “right” answer is.
> I would rather not buy another starter home, I want to buy the home I truly want to put down roots in.
Buy a home you can AFFORD. Do not get a bigger house than you can afford. It’s too soon to talk about roots when you’re single.
80% matching?
Where do you work and are they hiring??
My work matches 50% UPTO the 10% I allocate. I’ve opted to put in 12% and they add 5%, so I’m hitting 17% for my 401K
Jeebus, the things I could do with a company allocating 80% of what I pout in across the board.
I would max at 20% and take their 80% of that in a heartbeat.
It is definitely a horrible idea. an 80% match at any level is huge. And getting into the housing market by buying a house for yourself is almost never a great investment, because even though your house increases in value, you’re also contending with maintenance and repairs, utility bills, property taxes, and a host of other costs inherent to home ownership.
IMO it’s not a matter of the 401k but generally taking on a mortgage with no margin of safety.
So it is always risky starting to mess with 401k contributions. As someone who is older, me keeping with my 401k has basically guaranteed that I can retire without any real concerns provided I don’t try and live in a mansion. However, houses can be great investments as well so not contributing say 60k over 2 years could equate to a few 100k if/when you sell your house.
You are still young and have 30 years to still save up. If you were 45 with these numbers I’d say no way. But now, it wouldn’t be the worst decision and could be a big benefit if your house increases in value.
>My company matches any contribution 80%, it’s an incredible program. At 31, I only have about 105 k saved.
Based on this info, no way I’m temporary stopping 401k contributions. The amount of free money (match) that you would miss out on is insanely high. Also, you’re still in the early years where time in the market and compounding interest is extremely important. Stay the course!
Yes, don’t do this. Don’t buy a home that’s more expensive that you can afford, period. It’s a MUCH better investment at your age to continue to invest in your 401k and get that amazing company match. Keep renting or buy something smaller within your means.
If you have 80% match and want to get the house why not just get 401k and then withdraw it immediately to have more cash? The penalty does not come close to 80% and you still get pure profit
With an 80% match I would max it out ASAP every year.
80% match is unbelievable, I’d max out my 401k forever
Put down roots as a single person? You might be changing plans or realize you’re not in an ideal spot if you meet someone.
Financial counselor here:
This post gives “case study” vibes to me, like one might see in a socioeconomics or behavioral finance textbook.
OP, can you give more details do that the contributors can better assess your situation?
Is there a cap on the amount that your employer is willing to match?
What is your annual/monthly income and what is the expected P&I + escrow?
What is the expected capital gain for the property during time period in which you are considering pausing your contributions, and how did you arrive at that figure?
What kinds of investments make up your current retirement portfolio, and what kinds of returns can you reasonably expect?
What are you currently paying in rent?
How much is your rent likely to increase year over year in the area you are living in?
These are just a few of the questions someone would need answers to before they could even begin to offer any useful feedback.
### TL,DR: Talk to a financial advisor to see how pausing contributions would affect your retirement picture.
> early 30s […] I would rather not buy another starter home, I want to buy the home I truly want to put down roots in
Too much, too soon. As much as moving is a PITA, buying more house than you can afford isn’t a good move, either. For one, if you lose your job for an extended period of time it’s very likely that you’ll wind up losing the house too.
Absolutely no shame in buying what you can afford and then working your way up.
You should never pause 401k contributions for anything that isn’t an absolute, unavoidable emergency.
That said, “temporarily” could mean a lot of things. I paused my contributions for around a year – again, not a good move – because I was paying for 2 houses at once while getting the previous house ready for sale. It didn’t affect my retirement goals, but it might affect yours. If anything, my biggest regret was not fixing up the old house faster so I could have thrown away less money paying the mortgage for it.
Can you get a renter that later funds the mortgage?
What I read is that you could afford the starter home but don’t want one. Why not just go for a starter for now and take advantage of the rising equity in the rising real estate market in your area? Then, after a while, maybe after rates drop, sell your starter and use the equity to help you get into a dreamier home? That way the money isn’t going down the drain to rent and you can keep saving your horde, I mean retirement? Honestly, over 100k at your age is not shabby.