Retirement Savings: Here’s Why Putting Off Saving for Retirement To Buy a Home Isn’t the Best Idea
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Andrew Lisa
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Ashleigh Ray
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Housing prices have fallen from last year’s all-time high, but the current median of $431,000 is still out of reach for many. On top of that, the highest mortgage rates in more than two decades aren’t making homeownership any more accessible.
Those challenges have convinced some people to pause saving for retirement until they sock away enough for a down payment — but putting your nest egg on the back burner in the pursuit of homeownership is a dangerous gamble.
“Putting off retirement savings in favor of buying a home can have long-lasting financial consequences,” said Mike Crews, MBA, certified financial planner (CFP), founder and CEO of North Texas Wealth Management and author of “Saturday Everyday: 9 Simple Steps to Live Your Best Financial Life.”
“You risk losing out on compound interest, diminish your financial flexibility and face a harder uphill battle to secure a comfortable retirement,” Crews added. Here are a half-dozen reasons why you should reconsider shelving your retirement fund to save for a down payment.
There’s No Such Thing as a Retirement Loan
If you’re financially responsible, a lender will float you money to buy a home, and there are many programs that can make the process easier and more affordable. But no credit score is high enough to convince a bank to loan you money for late-life income after you’ve stopped working.
“You can borrow money to purchase a house, but you cannot borrow money to live comfortably in retirement,” said Lauren Locker, CFP, NAPFA-registered financial advisor and founder of Locker Financial Services.
You Don’t Have To Pick One or the Other
Another reason you shouldn’t choose amassing a down payment over building a nest egg is that you don’t have to — the two pursuits aren’t mutually exclusive.
“Saving for a home and retiring are two separate life goals,” said Greg Wilson, chartered financial analyst and founder of the personal finance sites ChaChingQueen and Dad Is Fire. “It is important to save enough for retirement, but shelter, on the other hand, is an expense. They are not one or the other.”
Locker agrees.
“Saving should not be all-or-nothing,” she said. “Deposit a little less into your retirement account for a few years while you save for your down payment, but continue the savings habit.”
Or you could take the opposite path to achieving both goals simultaneously.
“My recommendation is that you max out your 401(k), and any money left over should be focused on saving for a down payment,” said Wilson.
Two Words: Compound Interest
Compared to retirement planning, saving for a down payment is a relatively short-term goal that depends more on your contributions and less on any returns they gain. On the other hand, you should keep saving at least a little for your far-off retirement because, over time, a little can become a lot.
“One pivotal reason people should not delay their retirement savings to purchase a home is the power of compound interest,” said Dennis Shirshikov, who knows both sides of the issue as a professor of finance, economics, and accounting at the City University of New York and the head of growth for the real estate investing firm Awning.
“Starting early with retirement savings, even with modest amounts, can lead to substantial growth over time,” Shirshikov continued. “For instance, an individual who starts saving $300 a month at age 25 will, with an average annual return of 7%, amass over $1.1 million by age 65. Conversely, if that same individual began saving at 35, the amount accrued by 65 would be around half that.”
Money in the Bank Is Guaranteed. Home Appreciation Is Not.
The investments that make up your nest egg can go up or down as markets fluctuate, which is why most people shift to more conservative portfolios as they get closer to retirement. But diversification can mitigate risk and traditional investments are highly liquid.
A single physical property, on the other hand, is neither diversified nor liquid, which means it makes you vulnerable.
“Real estate, though often touted as a sound investment, is not without risks,” said Shirshikov. “Market fluctuations, unexpected maintenance costs and changes in neighborhood dynamics can influence the value of a home.”
Failure to appreciate is not an abstract concept, as longtime residents of countless declining cities can attest.
“I recall a former student of mine who prioritized buying a home over saving for retirement,” said Shirshikov. “While the home initially appreciated in value, an unexpected downturn in the local economy led to its depreciation, causing financial strain. Meanwhile, he had missed out on several years of potential retirement savings growth.”
House Rich but Cash Poor Is a Bad Way To Retire
Equity is dead money until you harvest it from your home, which can be a difficult and expensive process. Turning equity into spendable cash involves selling your house, establishing a HELOC, taking out a home equity loan, pursuing a cash-out refinance or agreeing to a reverse mortgage.
None of those are guaranteed, but all come with risks and expenses — and until you complete the process, your wealth is trapped in your home and inaccessible for use in daily life.
“Relying on the value of your home as your retirement fund can be risky because it might be hard to access that money when you need it,” said Baruch Silvermann, CEO of The Smart Investor.
“If you put your money into a house instead of saving for retirement, you might not have enough money to live comfortably after you stop working. This could lead to financial problems during your retirement, where you might not have enough money to cover important expenses, maintain your desired lifestyle or deal with unexpected costs.”
If You Put All Your Money Into Your House, Who’s Going To Pay for Your House?
Finally, your down payment is just the cover charge for homeownership, and if you pursue that at the expense of long-term savings, the many other other housing costs will eventually eat you alive.
“Owning a home comes with ongoing expenses like mortgage payments, property taxes, insurance, maintenance and repairs,” said Silvermann.
Even if you own your home free and clear by the time you retire, your mortgage is just one expense of many, and the others never go away — in fact, homes cost more the older they get.
“If you spend your savings on a home without saving enough for retirement, you might struggle to afford these housing-related costs, which can be really stressful,” said Silvermann.
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