Buying a house is a large financial commitment and often the smartest one you can make. But you need to determine whether it’s the right commitment at the right time. Because this is the big picture: Shouldering mortgage payments for the greater part of your life will likely affect how much money you’re able to stash away for retirement. So in addition to browsing real estate listings and checking out open houses, you’d better be thinking about how well you’re saving for retirement. After all, the last thing you want is to be forced to postpone your golden years because you became a homeowner too early.
“The old-school mentality is that you want to own a home when you start a family, but there’s nothing wrong with pushing back buying a house to save more for retirement,” says Brandy Wright, a certified financial planner at Modera Wealth Management in Atlanta.
Of course, we’re not saying you shouldn’t buy a house. We’re just suggesting you weigh the financial consequences carefully before diving into homeownership.
When you’re contemplating buying, here are three questions you should ask yourself to determine if now is the right time.
Question No. 1: Where will I get the money for a down payment?
Before you delve any further, you need to first make sure that you have enough cash for the down payment. Most financial planners recommend that home buyers strive to make a down payment amounting to 20% of the price of the home in order to avoid paying private mortgage insurance, or PMI, a premium that protects your lender in case you default on the loan. (PMI ranges from about 0.3% to 1.15% of your home loan.) With the national median home price currently around $235,000, according to the National Association of Realtors®), the average 20% down payment costs $47,000.
If you don’t have enough cash to make a down payment, you might be considering dipping into other savings accounts—like your retirement fund. However, making early withdrawals from an IRA or 401(k) might be a big mistake for two reasons. If you borrow from either plan before age 59½, you’ll get slapped with a 10% excise tax on the amount you withdraw, on top of the regular income tax you pay on withdrawals from traditional defined contribution plans. Also, withdrawing funds prematurely prevents the money from accruing interest in these accounts—a mistake that can have a “huge negative impact on your retirement plans,” says Craig Jaffe, a financial planner at United Capital in Boca Raton, FL.
Basically, if you need to tap retirement savings to scrape together enough money for a down payment, you’re better off waiting a few years until you save more cash.
Question No. 2: Am I getting the full company match on my 401(k)?
Many employers offer to match employees’ 401(k) contributions with contributions of their own as long as the worker deposits enough money in the account; some companies will even match up to 6% of your salary. If buying a house means that you won’t be able to contribute enough money to your 401(k) to get your full company match, you need to prioritize saving for retirement, says Wright.
“You never pass up free money,” she says. Translation: Getting your employer’s 401(k) match might, in some cases, be more important than being able to purchase a house. At least for now.
Another advantage to maxing out your 401(k) is that all of the wage contributions and company matches are tax-deferred, so you reap an immediate tax advantage, says Jaffe. For example, if you earned $50,000 one year but contributed $3,000 to your 401(k) plan, you would declare taxable income of only $47,000.
Question No. 3: If I buy a home, will I still be on pace to retire on time?
“For most people, Social Security alone is not going to foot the entire bill for retirement,” says Wright. One reason that’s the case is because people are living longer. (The average life expectancy in the U.S. is 79 years, up from 71 in 1970.) Also, if you overextend yourself and need to use the money you would put in your retirement fund to make your mortgage payments, you’ll be in a serious bind.
Deciding whether to buy a house now or save more money for retirement will hinge on what type of retirement lifestyle you want.
“If you’re used to a $100,000-a-year lifestyle and you want to continue that lifestyle in retirement, you’re going to need to save more money than other people,” Jaffe says.
Something else to consider: If you think buying a house and building equity will set you up for a comfortable retirement, Jaffe says you could be sorely mistaken.
“I don’t view buying a personal home as an investment,” he explains. “You’re technically building equity, but as people learned during the recession, building equity is not always the ultimate outcome.”
Moreover, “buying a home barely keeps pace with the rate of inflation,” Jaffe adds. Therefore, you don’t want all of your retirement savings locked up in your home.
The moral of the story: Make sure your nest egg is in good shape before you decide to buy a house.