Saving up to buy a home and retire comfortably would perhaps be easier to do if we all earned six-figure incomes or had ways to magically minimize our ongoing expenses. But alas, that isn't the case. And so you may find yourself torn between your desire to own a home and your desire to set yourself up for a financially secure retirement.
In many cases, it is possible to save for retirement and a home down payment at the same time. But what if money is so tight that you're forced to choose?
In that case, your best bet is to focus on funding an IRA or 401(k), and then work on saving for a home once your financial situation changes. Here's why.
You can't afford to not have retirement savings
You need a place to live -- there's no question about that. But your home does not have to be one you own.
On the other hand, you absolutely need savings to pay your bills in retirement. Social Security might pay you a decent-sized monthly benefit in retirement, but in many cases, it won't be enough to cover your expenses in full. So you'll need to prioritize your IRA or 401(k), or whatever account you're saving in, to ensure you don't wind up cash-strapped as a retiree.
You might build more wealth by investing anyway
One financial benefit of owning a home is getting to build home equity in a place of your own. If your home gains enough value, you might then be able to sell it at a nice profit. But if you invest your money for many years, you might set yourself up for an even bigger profit.
Real Estate Witch says that U.S. home prices appreciate 2% to 3% in value per year, on average. But the stock market has delivered an average return of 10% a year before inflation over the past five decades if we go by the performance of the S&P 500 index.
So, let's say you buy a home for $300,000 and hold it for 30 years. If it appreciates at a rate of 3% a year, it will be worth around $728,000 when you go to sell it. So you're looking at what could be a $428,000 profit.
On the other hand, let's imagine that instead of saving your money to buy that $300,000 home and keep up with its mortgage loan, you instead put $500 a month into an IRA over a 30-year period. If your investments deliver an average annual 10% return, you'll be looking at a balance of about $987,000. When we subtract the $180,000 in contributions made over 30 years ($500 a month x 360 months), that's a gain of $807,000, which is almost twice the profit you'd be looking at on a home in the aforementioned example.
In an ideal world, you'd be able to sock money away for a home purchase while also consistently funding a retirement plan. But if you have to choose, opt for the latter.
You don't want to risk struggling financially for many years because you used all of your money to buy a home. And remember, you could always prioritize your nest egg but work on buying a home a bit later in life as financial circ*mstances allow.
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FAQs
The Bottom Line. Most experts agree that retirement savings should take precedence over other kinds of savings, but that doesn't need to obstruct the path to homeownership.
What is the $1000 a month rule for retirement? ›
One example is the $1,000/month rule. Created by Wes Moss, a Certified Financial Planner, this strategy helps individuals visualize how much savings they should have in retirement. According to Moss, you should plan to have $240,000 saved for every $1,000 of disposable income in retirement.
Should I pause retirement savings to save for a house? ›
After all, at Ramsey, we teach you to start investing 15% of your household income for retirement after you're out of debt and have your full emergency fund in place. But if you're planning to buy a house in the near future, it's okay to hold off on your retirement savings and put that money toward your down payment.
How to split savings between retirement and house? ›
In many cases, it is possible to save for retirement and a home down payment at the same time. But what if money is so tight that you're forced to choose? In that case, your best bet is to focus on funding an IRA or 401(k), and then work on saving for a home once your financial situation changes.
Should I buy a house before or after I retire? ›
There can be some significant financial benefits to purchasing a retirement home before you actually retire. May be easier to qualify if you buy while you're still working. The Equal Credit Opportunity Act means creditors cannot discriminate against you based on your age or life expectancy.
Should I sell my house before or after I retire? ›
Selling your house and renting when you retire can be a good idea for some homeowners. If you have equity in your home, you may want to use that cash for something else now that you're retired. On the other hand, you may have reasons you'd like to stay in your current home.
Can you retire at 60 with $300 000? ›
If you've managed to save $300k successfully, there's a good chance you'll be able to retire comfortably, though you will have to make some compromises and consider your plans carefully if you want to make that your final figure.
Can I retire at 62 with $100,000? ›
“With a nest egg of $100,000, that would only cover two years of expenses without considering any additional income sources like Social Security,” Ross explained. “So, while it's not impossible, it would likely require a very frugal lifestyle and additional income streams to be comfortable.”
Can I retire on $3000 a month? ›
That means that even if you're not one of those lucky few who have $1 million or more socked away, you can still retire well, so long as you keep your monthly budget under $3,000 a month.
What is the best age to save for retirement? ›
If you contribute $1 at age 35, it could grow to $3.24 by the time you're age 65. If you contribute $1 at age 40, it could grow to $2.67 by the time you're age 65. If you contribute $1 at age 45, it could grow to $2.19 by the time you're age 65.
A paid-for house provides stability.
It'll help keep your finances steady, no matter how stormy the stock market or economy might be during your retirement. When you pay off your mortgage early, you won't have to spend your retirement worrying about fluctuating interest rates or what the housing market is doing.
Is it better to retire with or without a mortgage? ›
Key Takeaways. Paying off a mortgage can be smart for retirees or those who are just about to retire if they're in a lower income tax bracket, It can also benefit those who have a high-interest mortgage or who don't benefit from the mortgage interest tax deduction.
Should you prioritize saving for house or retirement? ›
The answer, ideally, is both. By investing in a mix of assets you are putting your money to work in different ways -- and potentially hedging against the risks associated with each type of investment. But most financial experts say retirement saving should be prioritized.
What is the golden rule of retirement savings? ›
Retirement may seem like a distant dream, but it's never too early or too late to start planning. The “golden rule” suggests saving at least 15% of your pre-tax income, but with each individual's financial situation being unique, how can you be sure you're on the right track?
What is the 2 rule for retirement? ›
The 2% rule for retirement represents the most conservative approach among the withdrawal rate strategies. This strategy suggests retirees withdraw only 2% of their total retirement corpus in the first year of retirement, with subsequent annual adjustments for inflation.
Is it better to save for retirement or pay off a mortgage? ›
It's also better to start saving for retirement early, so you can reap the benefits of compound interest over a longer period of time. As a general rule, the younger you are, the more you should prioritize your retirement savings over your mortgage.
Is it better to invest in real estate or retirement? ›
If the goal of investing is to retire at the common age of 59 or older with a set amount in savings, a retirement fund may be the best option. On the other hand, if a person is looking to increase their overall wealth to retire early, real estate is the better choice.
Should I put money into savings or retirement? ›
Key takeaways
Prioritize savings if you don't have an emergency fund. Consider investing what you can if you're eligible for a 401(k) match. Choose saving over investing if you'll need the cash in the near future.
