Saving for retirement vs Home Down payment?

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Saving for retirement vs Home Down payment?

Postby countofmc » Thu Feb 14, 2013 5:23 pm

Ideally I'd like to purchase a home, hopefully in the next 5 years.

Unfortunately, I live in the SF Bay Area, where a "decent" home could cost upwards of 400k. Even if I were to move somewhere cheaper and buy a more reasonable 200k home, I'm still looking at coming up with 40k of cash for a down payment. If I stay in the Bay Area, I'd probably need 100k.

If I forego ALL retirement savings outside of what is needed for 401k company match, I can probably save about 2k/month. And this is about as frugal as I can get outside of moving in with parents or something (we are married and in our 30s, so that's really not an option).

So would it be wise to forego retirement savings for 4-5 years and save up a down payment? Half-half? Or just max out retirement and postpone buying a home indefinitely?
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Re: Saving for retirement vs Home Down payment?

Postby NYBoglehead » Thu Feb 14, 2013 5:32 pm

I'd place the emphasis on retirement savings. The biggest asset we have with retirement savings is time, so you might as well take advantage of it. Right now interest rates are in the toilet, so if you're forgoing retirement savings to build up a down payment fund in a savings account the interest you earn will not maintain your purchasing power and chances are you'll be losing some purchasing power.

Maybe the best thing to do is find a middle ground: save for retirement while setting some aside for the house. And while I certainly would recommend putting 20% down if you're able, putting 15% down when the time comes isn't a crime. You'll have to pay PMI until 22% is reached but in the end that shouldn't sink you, and you could always re-direct money towards extra principal payments to knock out PMI sooner.
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Re: Saving for retirement vs Home Down payment?

Postby rr2 » Thu Feb 14, 2013 5:57 pm

countofmc wrote:Ideally I'd like to purchase a home, hopefully in the next 5 years.

Unfortunately, I live in the SF Bay Area, where a "decent" home could cost upwards of 400k. Even if I were to move somewhere cheaper and buy a more reasonable 200k home, I'm still looking at coming up with 40k of cash for a down payment. If I stay in the Bay Area, I'd probably need 100k.

If I forego ALL retirement savings outside of what is needed for 401k company match, I can probably save about 2k/month. And this is about as frugal as I can get outside of moving in with parents or something (we are married and in our 30s, so that's really not an option).

So would it be wise to forego retirement savings for 4-5 years and save up a down payment? Half-half? Or just max out retirement and postpone buying a home indefinitely?


I was in a similar situation in a moderately high cost of living area.This was how we did it.

-- Do not make employee contributitions to 403b plan. My employer contributed 10% with no employee contributions required.
-- Keep money aside in a savings account and then contribute to two Roth IRAs at the very last minute i.e. before tax filing. Also Roth contributions went into conservative stable value funds.
-- Put the rest into a savings account for home down-payment till I reached 10%
-- Once 10% was reached, then contribute partly to the 403b plan and save the rest for the down payment.

We did this for about two years before we found our house. We had approximately 15% for a down payment. I took a temporary 403b loan for 6 months to get the remaining 5% instead of withdrawing from the Roths.
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Re: Saving for retirement vs Home Down payment?

Postby icefr » Thu Feb 14, 2013 6:01 pm

Are you sure that you want to stay in the SF Bay Area for the next 5-10 years? I might consider foregoing retirement savings for 6-12 months to beef up your after-tax savings, but not for 4-5 years.

Some middle ground is necessary here. Decide how much you want to set aside for retirement and then save for a house with the other money. Maxing out your 401(k) AND Roth IRA isn't a requirement of life. For example, I decided in my first year working that I wanted to set aside 20% of my income for retirement and the rest was after-tax savings for short-term goals. Which tax bracket are you in? Are you close to the bottom of the 28% tax bracket? If so, I would consider putting enough into 401(k)s to not pay tax on any income at 28%.

Keep in mind too that you don't just want cash for a down payment. You also want cash for closing and moving costs and any "new" furniture that you "need" as part of moving to a bigger place.
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Re: Saving for retirement vs Home Down payment?

Postby Aptenodytes » Thu Feb 14, 2013 6:03 pm

It is a tricky question. You need to be accurate and honest about what you are likely to do in the next 5-10 years while waiting to buy a house. I think in practice that many people that try to save both for a house and for retirement end up dipping heavily into their retirement funds once their home-ownership itch becomes irresistible and purchase seems within reach. I know in my case I liquidated everything except the 403B when I finally was able to buy (also in a high price housing market). If you are going to end up using the money in 5-7 years for a down payment, it is better to set the money aside in a safe vehicle from the start rather than to put it in equities and then cash it in early.

In practice that suggests estimating a safe amount you can invest for retirement and be highly confident you will never be tempted to liquidate, and put the rest in a liquid vehicle for down payment use.

Another thing that matters is your likely income trajectory. If you are already near your peak, you might want to scale back housing dreams and focus on retirement. But if you reasonably expect your income to rise, it is less risky to focus on housing now, retirement in a few years.
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Re: Saving for retirement vs Home Down payment?

Postby countofmc » Fri Feb 15, 2013 1:16 pm

Thanks everyone!
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Re: Saving for retirement vs Home Down payment?

Postby hand » Fri Feb 15, 2013 1:41 pm

A Roth IRA seems perfect for this purpose - withdrawals of contributions are always allowed.
Save money in Roth IRAs now, when the time comes, you can decide whether you want to forgoe the future tax benefits of keeping in a Roth for retirement or use for down payment as you choose.
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Re: Saving for retirement vs Home Down payment?

Postby NorCalDad » Fri Feb 15, 2013 1:42 pm

I would prioritize retirement. That doesn't mean you have to devote all savings to retirement, but I would figure out a priority list. I'd probably do it like this: first get the 401k match, second max out Roth IRA, then split the rest between 401k and home down payment savings. You could tap the Roth for your home if you decide you need it down the road, but the best scenario would be to keep it for retirement.

I'd think hard about whether the Bay Area makes sense for homeownership. I think you'd need more than $400k in the Bay Area unless you're looking at condos, especially if good schools are a consideration. If you buy in the Bay Area, you may also face an ongoing mortgage payment vs. retirement savings issue.
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Re: Saving for retirement vs Home Down payment?

Postby jjg247 » Fri Feb 15, 2013 2:00 pm

Are you or your spouse eligible for a 401k type plan? Many allow loans for the purchase of a home.

I was in a similar situation as you. I was saving a lot of my after tax salary for a down payment. It bugged me that for each dollar of this savings, I was paying between 25-40% in combined taxes. I decided to contribute as much as I could to my 401k and take a loan when the time came to purchase a home. I was only permitted to borrow half of the account balance or 50K. In my simple back of envelope calculation, I could lose a large portion to taxes by saving the traditional method or I could lose the ability to utilize a portion of my money for a house down payment BUT the whole dollar would be mine. i was able to save 20% for a downpayment this way and never had to pay PMI. Now Uncle Sam has to wait until I retire to get a taste.
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Re: Saving for retirement vs Home Down payment?

Postby statsnerd » Fri Feb 15, 2013 3:08 pm

I agree on prioritizing retirement.

A bigger question, you say costs upward of $400k or more reasonable and cheap at $200k. Where in the Bay Area is this? I lived there for 7 years and recently moved away. The places I was looking at were 600k+ for 2-3 bedrooms
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Re: Saving for retirement vs Home Down payment?

Postby countofmc » Fri Feb 15, 2013 3:18 pm

statsnerd wrote:I agree on prioritizing retirement.

A bigger question, you say costs upward of $400k or more reasonable and cheap at $200k. Where in the Bay Area is this? I lived there for 7 years and recently moved away. The places I was looking at were 600k+ for 2-3 bedrooms


$400k would probably be a minimum for a 2br condo/ townhome in a fairly safe area.

200k was the figure I was giving if I were to move out of the Bay Area to a cheaper COL area.
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Re: Saving for retirement vs Home Down payment?

Postby yeledbed » Sat Feb 16, 2013 9:25 pm

jjg247 wrote:I was in a similar situation as you. I was saving a lot of my after tax salary for a down payment. It bugged me that for each dollar of this savings, I was paying between 25-40% in combined taxes. I decided to contribute as much as I could to my 401k and take a loan when the time came to purchase a home. I was only permitted to borrow half of the account balance or 50K. In my simple back of envelope calculation, I could lose a large portion to taxes by saving the traditional method or I could lose the ability to utilize a portion of my money for a house down payment BUT the whole dollar would be mine. i was able to save 20% for a downpayment this way and never had to pay PMI. Now Uncle Sam has to wait until I retire to get a taste.


This doesn't seem like a good idea to me. Don't you pay the loan back with after-tax dollars? Then pay ordinary income tax again at retirement? Sounds like Uncle Sam is getting twice the money! Plus, if you lose your job or want to change jobs, the loan will be due in full.

To address OP's question, do both. Try to put at least 10% toward retirement, then put any additional funds toward the house down payment. When you get a raise, increase your savings, not your spending. Delaying the purchase of a home by a few years because you were contributing to retirement is not a big deal. In 30 years, you would probably regret not contributing to your retirement account and letting time do its job.
Last edited by yeledbed on Sat Feb 16, 2013 9:48 pm, edited 1 time in total.
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Re: Saving for retirement vs Home Down payment?

Postby HornedToad » Sat Feb 16, 2013 9:33 pm

I would do half/half.

Basically pick a retirement savings you are comfortable with while still leaving some for home down payment: 10% or 15% is good numbers, 5% or so in a pinch. Then save the rest for the home. That way you are making progress towards both goals and if absolutely necessary can always do the 401k loan and repay later so that your 401k keeps growing.

That's what we did. Saved ~10-15% in 401k and then all other taxable savings was for home down payment.
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Re: Saving for retirement vs Home Down payment?

Postby jjg247 » Sat Feb 16, 2013 9:53 pm

yeledbed wrote:
jjg247 wrote:I was in a similar situation as you. I was saving a lot of my after tax salary for a down payment. It bugged me that for each dollar of this savings, I was paying between 25-40% in combined taxes. I decided to contribute as much as I could to my 401k and take a loan when the time came to purchase a home. I was only permitted to borrow half of the account balance or 50K. In my simple back of envelope calculation, I could lose a large portion to taxes by saving the traditional method or I could lose the ability to utilize a portion of my money for a house down payment BUT the whole dollar would be mine. i was able to save 20% for a downpayment this way and never had to pay PMI. Now Uncle Sam has to wait until I retire to get a taste.


This doesn't seem like a good idea to me. Don't you pay the loan back with after-tax dollars? Then pay ordinary income tax again at retirement? Sounds like Uncle Sam is getting twice the money! Plus, if you lose your job or want to change jobs, the loan will be due in full.

To address OP's question, do both. Try to put at least 10% toward retirement, then put any additional funds toward the house down payment. When you get a raise, increase your savings, not your spending. Delaying the purchase of a home by a few years because you were contributing to retirement is not a big deal. In 30 years, you would probably regret not contributing to your retirement account and letting time do its job.


Its not double taxed, frequent misconception covered on this board several timed. Agree on your other point though, job security is a must.
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Re: Saving for retirement vs Home Down payment?

Postby jjg247 » Sat Feb 16, 2013 9:55 pm

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Re: Saving for retirement vs Home Down payment?

Postby Honobob » Sat Feb 16, 2013 9:59 pm

countofmc wrote:

So would it be wise to forego retirement savings for 4-5 years and save up a down payment? Half-half? Or just max out retirement and postpone buying a home indefinitely?

I bought in the Bay Area in 1986. Property has appreciated about 11% a year. Two years after I bought it had doubled in value. I would look at your first house in the Bay Area as the best investment in your future you'll ever make. There's a reason equity immigrants come from California and NOT Kansas. Look at rents over the last 20-30-50 years. I bought with $5,000 down FHA at 12%.
Property taxes are frozen with Prop 13 and interest rates are probably the best you'll ever see.
I would check into all first time homebuyer programs. Have you seen ALL the construction cranes near Market street?
It's slowly dawned on me that we won the real estate lottery!
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Re: Saving for retirement vs Home Down payment?

Postby NorCalDad » Sat Feb 16, 2013 10:03 pm

The easiest way for me to disprove the double-tax misconception is to consider the alternative of a consumer loan. If you borrowed $50k from your bank, you'd be paying that back with after-tax money as well. The 401k serves as your lender but at a better interest rate. The biggest pitfalls of 401k loans are losing/leaving your job and having a plan that requires immediate repayment, as well as converting the borrowed share to a bond investment, which may not comport with your desired asset allocation.
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