Saving for Retirement Vs Saving for a House

[steve77777]

@otosongphuc At your age and so little into retirement, I will focus into the 401k. Why? with a 2900$ monthly spending, you need to save until 65 years old an amount of 1M. From other comments I learned you save under 1600 per month, that's enough to retire 65 years old if you keep same saving rate for the next 20-25 years.

When it is about buying a home, I looked, first, to buy a starting home - a small one, and aligned to income (the common rule for mortgage + insurance + taxes under 33% of income so for your case to stick with less than 1300$ mortgage) and your needs (now you are single) - and to replace the actual rent with similar mortgage value. After 4-5 years or when you living situation is different (bigger family / bigger income) you can sell and upgrade.

It is ok to add an extra job in order to save more for the paydown. Target the 20% of home value. Pay attention, the extra jobs are not for all the life, your age and health is for 40 years old, so when you calculate the mortgage, calculate under one income, not 2. I did this extra job when I was 25, now, same at your age, I would think twice before, I found it more effective to learn and find a better job, and to cut the spending.

 

[plainme]

@otosongphuc In your position (and if you are in the USA), I would put any single dime directly into the 401K.

First would prioritize your retirement, but also you can buy a home with that same money when you get the opportunity.

USA's law, at least up to the moment, allows you to retire money from your 401K plan without penalty if it's would be used for the purchase of your first home.

As you can see, you can play both "games" at the same time here... while saving for your home you are also being aggressive with your retirement plan too!!!!

Double-check with your 401K plan holder before making any decisions.
I hope this can help you, Good luck!!

 

[chaosensues]

@plainme Isn't a caveat to this that you get severely penalized with interest if you quit your job or get fired with a 401k loan?

 

[baptistp]

@otosongphuc At your age and current savings you should prioritize retirement because compounding interest growth benefits from time in the market. With each passing year you don't contribute, either the less you will accumulate or the more you will have to save to achieve the same ceiling. Generally, income goes up as you age so that you can maintain your investment rate while having extra income to save for a secondary goal like a house. If you're 20 and just starting, you'd have time to recover from spending 5 years or so saving for a house.

 

[justin_holmes]

@otosongphuc Recommend jump starting the retirement savings. Reassess once you're at 2-3x annual expenses saved. Get an IRA started.

It's a slow, annoying, mildly unprofessional (eg nonresponsive staff) program but you might look into NACA.

 

[saved3john16]

@otosongphuc Start funding a Roth IRA. It is after tax money, and whatever you put in can be taken out, also once in a lifetime you can withdraw 10K in unrealized gains from it to buy a house. 7K is the maximum amount to put in this year. Try to max that out, and then put any excess into the 401k.

The Roth IRA Provides more flexibility in your situation.

Part of the big wealth building of buying a home is what is called forced savings. Meaning Money has to go toward the asset. People will cut back on other things to fund house payments.

 

[resjudicata]

@otosongphuc Why is everyone in this sub advising op to not buy a home but risk it on index funds? Help me understand here - how is index funds and market volatility more preferred over security of a house in oldage? Are we saying op should loose investments if things go downway and not even have a house? Even if things dont go down way why not have a home( even if house market crashes its for living) and little bit savings over lots of savings and being homeless? Not to mention the house is basic necessity and will always be valued more than the luxury to buy tech conpany stocks when in downtrend/ bad economy. What is that i dont understand here?

 

[forgivenandloved]

@resjudicata You need cash to pay for expenses in retirement. If all of your net worth is tied up in your house, you won't have enough cash to fund your everyday expenses and will have to sell the house anyway. If you have liquid investments, you can always use those to pay rent as well as fund your other expenses. Houses are also very expensive to maintain and require you to pay property taxes every year. The actual cost of living in a paid off house is much higher than most people realize, and that's not even taking into account the opportunity cost of having assets tied up in illiquid and non-income producing real estate vs. liquid and income-producing financial assets like stocks and bonds.

 

[resjudicata]

@forgivenandloved But what about a market crash event?
Stocks can be volatile. If these crash you risk not having the money to pay rent as well not not having a house since you invested in them instead of buying a house.

How do you justify above?
Bonds? Well then might as well say saving accounts .

 

[trumpetplayer090]

@otosongphuc If it’s just you and no kids I would buy a condo about 1500 square feet and low HOA. I wouldn’t want a house at this point with no savings for retirement as that would be my focus. Forget shoveling snow and cutting grass, no thank you. Put your money in your 401k and get a Roth.

 

[otosongphuc]

@trumpetplayer090 I was thinking along the lines of a townhouse for the same reasons you mentioned. No yard work, low HOA etc

 

[trumpetplayer090]

@otosongphuc You can do it then! Just get you a solid budget and see what you can afford for a mortgage but make sure you put something in your 401k.

 

[resjudicata]

@otosongphuc If you are currently on top of your bills, have no debt, and have savings you could easily qualify for a reduced rate as a first time home buyer. Usually I don’t recommend this because homeownership isn’t cheap and most who can’t afford 20% down can’t afford upkeep. You might be able to based on what you have told us though. However - right now house prices are extremely inflated. Unless it’s a fixer upper you might find yourself underwater in a few years. However - If you don’t plan to move there isn’t much risk here as it’s on paper

 

[otosongphuc]

@resjudicata I do have student loans and a very affordable car loan. My car payment is only $250 and I pay $145 for student loans but no other debt. I wouldn’t be able to do 20% down which does worry me a little. My plan was to save the 3% required for conventional mortgages along with closing costs and home inspection , etc.

 

[resjudicata]

@otosongphuc It’s possible with 3% down but I would advise against it. Save up 10% and then do a 3% down. One hvac issue will cost you $1000-3000, pluming the same.

 

[mae9]

@otosongphuc IDK put a couple bucks away for retirement, but I hate to break it to you but that ship has likely sailed if you're just getting started at 40. It's going to take a Herculean effort to make that 401k turn into anything significant and with a 401k nothing's guaranteed, you need a lot of luck as well.

I'd say prioritize buying a house. The stress of renting kills (according to the front page of USA today, today). I'd look into alternative strategies for retirement since you got started late i.e., rental property or a job with a pension.

 

[baptistp]

@mae9 If she was to contribute $1500 a month to a 401K for the next 25 years (retirement at 65), she could have $1.2M in her 401K at 7.5% SP500 rate of return. She would still have $3000-3500 a month depending on whether she contributed to traditional or Roth. At first it would be tough but down the road her income would increase (hopefully more than inflation).

 

[sarah15]

@otosongphuc What’s your primary reason for buying a home?

Is the 401k your total retirement savings?

What is your income vs budget (now and while living in your future home)?

Unless you are very confident home ownership in your desired area is cheaper than renting, I’d seriously weigh your needs in retirement vs your desire to own a home. This might mean getting better footing for retirement and saving for the home over a longer period of time.

You should at the very least be getting max 401k match (if your employer offers it), but ideally you’d throw everything you can into Roth 401k and Roth IRA. Don’t stop investing for retirement completely unless you want to work forever. You need to catch up on retirement however you can.

 

[otosongphuc]

@sarah15 I’ve always wanted to own my own home! I want to be able to do some light projects and really make it my own.

Right now, yes 401k is all I have. I bring home about $4500 per month and am spending about $2900 per month.

In this market, I can find a home that’s comparable to my rent but not cheaper unless I live in a house and neighborhood that I absolutely do NOT want to live in.

 

[sarah15]

@otosongphuc Totally get that!

I think you need to get clear on how much you need to retire and then make sure you’re saving enough to get there. Ideally your income keeps increasing and you can afford to hit the retirement goal AND pay for the house. But it might not be quick.

Home ownership has a lot of hidden costs, and you don’t want to get into a situation where you’re house poor or unable to save enough to retire. Make sure you’re truly looking at ALL of the costs (taxes, closing costs, repairs, opportunity cost of down payment, etc.). If it’s still comparable to renting, I think there’s a stronger case to buy sooner so long as you intend to stay for a while.

Please do take the tax-advantaged retirement accounts seriously though - tax free compounding growth in a Roth 401k or IRA is more powerful the sooner you invest in them.