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
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.
Is it better to save for a house or save for retirement? ›
Key Takeaways
To safeguard your financial health, prioritize paying off high-interest debts, adding to an emergency fund, and paying into a retirement account. Home equity can benefit you financially, but retirement savings may be critical to supplement Social Security payments and pay for essentials later in life.
What is the $1000 a month rule for retirement? ›
The $1,000-a-month retirement rule says that you should save $240,000 for every $1,000 of monthly income you'll need in retirement. So, if you anticipate a $4,000 monthly budget when you retire, you should save $960,000 ($240,000 * 4).
Does owning a house count as retirement savings? ›
Key Takeaways
Home equity can be a significant source of wealth for retirees, often representing a large portion of their net worth. It can be used to supplement retirement income, fund long-term care, or pass wealth to heirs. Retirement planning can be complex, but your home equity shouldn't be overlooked.
What if I don't have enough money to save for retirement? ›
If you retire with no money, you'll have to consider ways to create income to pay your living expenses. That might include applying for Social Security retirement benefits, getting a reverse mortgage if you own a home, or starting a side hustle or part-time job to generate a steady paycheck.
Is it smart to pay off your house when you retire? ›
You want to save on interest payments: Depending on a home loan's size, interest rate, and term, the interest can cost hundreds of thousands of dollars over the long haul. Paying off your mortgage early frees up that future money for other uses.
How much of my retirement savings should I spend on a house? ›
The 25% rule of thumb while retired
My suggestion is to limit your mortgage, or rent, payment to less than 25% of your total retirement income. 25% still is low enough, that for many of us, after a mortgage and income tax payments, less than 40% of your income is going away to taxes and mortgage payments.
How long will $500,000 last year in retirement? ›
Yes, it is possible to retire comfortably on $500k. This amount allows for an annual withdrawal of $20,000 from the age of 60 to 85, covering 25 years. If $20,000 a year, or $1,667 a month, meets your lifestyle needs, then $500k is enough for your retirement.
Can I retire at 60 with $500,000? ›
The short answer is yes, $500,000 is enough for many retirees. The question is how that will work out for you. With an income source like Social Security, modes spending, and a bit of good luck, this is feasible. And when two people in your household get Social Security or pension income, it's even easier.
Can you live off $3000 a month in retirement? ›
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.
The average American net worth is $1,063,700, as of 2022. Net worth averages increase with age from $183,500 for those 35 and under to $1,794,600 for those 65 to 74. Net worth, however, tends to drop for those 75 and older.
How much of your wealth should be in your home? ›
The rule of thumb: A common rule of thumb for real estate allocation is to invest no more than 25% to 40% of your net worth in real estate, including your home. This range can provide you with the benefits of real estate ownership while giving you enough flexibility to pursue other investment opportunities.
What is the average net worth by age? ›
Average net worth by age
| Age by decade | Average net worth | Median net worth |
|---|
| 40s | $713,796 | $126,881 |
| 50s | $1,310,775 | $292,085 |
| 60s | $1,634,724 | $454,489 |
| 70s | $1,588,886 | $378,018 |
4 more rowsUnless you have a secret plan to get free money or you're lucky enough to hit the lottery, not saving enough for retirement will leave you scrambling to get by in old age. At the very least, you'll need to work longer or make serious adjustments to your lifestyle to get by.
Do most people retire with enough money? ›
But most people are far from reaching that objective, with the study finding that the average amount held in a retirement account today is just $88,400. That means that the typical worker has a $1.37 million gap between their actual savings and their retirement aspirations.
Is it normal to not want to retire? ›
It's not uncommon for baby boomers to continue to work well into their 60s, 70s or even 80s. Some people decide to continue working because they need the money, while others love what they do and can't imagine not doing it anymore or just need to stay busy.
Is it better to buy a house before or after retirement? ›
Buying your retirement home before you retire may be useful for future financial planning. You'll have a clear idea about your monthly housing expenses, which can help you make better decisions about retirement planning. Plus, you can take advantage of low interest rates to lock in an affordable monthly payment.
Is it better to retire with or without a mortgage? ›
There may be good reasons to pay off your mortgage. It can save you thousands of dollars in interest, depending on the current size of your debt, and give you peace of mind that no matter what happens in the future, you own your home outright.
Is a house a better investment than a 401k? ›
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.
Is it better to invest in 401k or property? ›
Real estate investments provide monthly cash flow and passive income. When you invest your money in a 401(k), it's completely tied up until you reach retirement age. With real estate investments like rental properties, however, you can enjoy positive cash flow month after month, year after year.
