This post is from GRS staff writer April Dykman. It’s also a part of National Save for Retirement Week
A few weeks ago, J.D. asked me to consider writing a post on retirement for National Save for Retirement Week. As it was intended, National Save for Retirement Week made me reflect on the state of my and my husband’s retirement accounts.
Currently, our retirement savings are a tad pitiful. I have a 403(b) through my employer, who contributes to my account whether or not I do. After five years of employment, I’ll be eligible for a match. I also have a Roth IRA, though I stopped automatic contributions when we buckled down to pay off the credit cards and the auto loan. My husband doesn’t have a Roth IRA or 401(k), as it’s not offered through his employer.
Retirement is important to us, but we decided to defer significant saving for retirement until we were out of debt and had saved up for a down payment for our house. But in the spirit of National Save for Retirement Week, I’ve started to question whether that’s the best solution.
Our original plan: House first
Originally, we decided to put retirement savings on the back burner to save for the down payment on our house for a few reasons:
- We want to avoid private mortgage insurance (PMI). If we can put down 20 percent of the purchase price of a home, we’ll can avoid paying PMI, which is an initial premium payment of 1 to 5 percent of the mortgage (and may require an additional monthly fee). We could put down less than 20 percent and cancel the PMI or refinance without it when we’ve built enough equity, but we’d like to try for the 20 percent goal.
- We don’t plan to move from this home, so we like the idea of immediately having a substantial amount of home equity.
- We aren’t eligible for any employer contribution matches. My husband’s employer doesn’t offer one, and I won’t be eligible for another two years. (If one of us could receive a match, we’d contribute enough to take full advantage of it, since not doing so is turning down free money.)
- While we could make penalty- and tax-free withdrawals from our Roth IRAs (as long as we only withdraw the amount we’ve contributed), our down payment savings is safer in a money market account or certificate of deposit, since we know we’ll need the money in the short-term.
Once we saved up for the down payment, we’d turn our attention to maxing out our retirement plans.
Rethinking our savings
Now, however, my feelings are mixed. I’d like to start socking away even just a small amount each month for retirement. Just because we’d only contribute a small amount right now doesn’t mean it’s an insignificant amount. With many years ahead of us before retirement, the power of compounding has plenty of time to make the money grow.
Also, as those who’ve read my past posts already know, I believe personal finance and psychology are inseparable. Besides getting our retirement savings going, there’s a psychological boost to seeing that we are saving for the future every month. If we put just $200 into each of our IRAs starting this month, that will be $1400 in each account before the end of the tax year. I think we have enough room in our budget to come up with a few hundred dollars each month.
Another benefit is that once we’re settled into our new home and can direct our savings toward retirement, it will take just a few clicks of the mouse to increase our contributions. Our accounts will already be open and established, and we’ll already be used to making an automatic contribution. There will be no reason to put it off, no accounts to open, no paperwork to fill out, and no automatic transfer forms to complete. The more ways we can circumvent laziness and inaction, the more likely we’ll follow through with our plan.
Finally, we aren’t getting any younger. The longer we wait, the less time our money has to grow in our accounts. We’ve paid off our debt, we have an emergency fund, and there’s really no excuse to not save something. Anything. If not now, then when?
The new plan: Saving for both
In honor of National Save for Retirement Week, we’re going to take action. My Roth IRA is with Fidelity Investments, so I’ll simply reinstate the automatic, monthly contributions. We also will open a Roth IRA for my husband with Fidelity. I like their no-fee IRA and $200 starting investment (offered if you invest in mutual funds and agree to automatically contribute $200 per month, otherwise there is a $2,500 minimum initial deposit).
That’s the top priority on our to-do list this week. We’ll look at our budget to see exactly how much we can start contributing, and we’ll basically put our contributions on auto-pilot. Next year’s goal: max out both IRAs.
What about you? Do you think it’s a good strategy to build a down payment if it means compromising your retirement savings for a short period of time?
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Nope. I think you should do exactly what you’ve decided to do in this post: start contributing now. Even if it’s a small amount. JD just went over this yesterday with the Pay Yourself First post. You have to pay yourself first, and that includes your future, retirement self too. You said it yourself, you’re not getting any younger and you can’t make up for all those years of compounding.
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I think your new plan is good but I also consider purchasing a house as part of retirement savings – my husband and I plan to buy a large family home for now and then trade down to a smaller house (possibly apartment even) when we are closer to retirement and use the difference in the sale and purchase prices as part of our retirement savings. In saying that though, we are in Australia where every employer is required to pay an additional 9% (minimum) of each employee’s income into a superannuation account (i.e. a retirement account that you can’t access until you are 65).
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It seems to me that most people posting to GRS who have moved on to the later stages of financial independence achieved balance early in their efforts.
Meaning, learning to take care of ALL areas of saving at the same time – a balanced approach – is the path that leads to the highest chance of success.
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i think the new plan is good. i don’t think it’s wise to put of retirement planning for a house. you’re very likely to need the retirement funds while the house is technically an option and not a necessity (you can be renters your entire life). a house can be an investment in your retirement … but they’re also huge financial and time drains requirement constant work. they don’t always appreciate either – see what’s been happening around the US over the last couple of years. all that said, i am a homeowner (and have been contributing to my retirement since my first post college job) and couldn’t imagine not owning my own home!
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April, I’m not sure how old you and your husband are and how big your budget is, so those factors are important in making these types of choices.
But, I think retirement savings is one of those goals that someone can keep putting off until they pay off debt, until they save for a house, then kids come along, and you need to pay for child care, start savings for college, etc. Pretty soon the time for retirement comes around and you realize you don’t have much put away and you don’t have time to catch up. I’ve always been saving for retirement (except when I was in college and the again when I was in professional school and had no income) even when I made very little was in debt and was working on saving for a house. If you start early or earlier the amount you need to save can be smaller.
I’d work on fine tuning your budget such that you can put aside more for retirment while also saving for your first home. There are small things you can do like bringing your lunch, cutting back on entertainment costs, etc. that can free up $20 – $40 a week which adds up.
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I am a 23 year old recently married high school teachers. We really want to save for a house, and with two years of hard saving we can have a downpayment. Is that ok to wait 2 years to contribute to retirement? I do have a Charles Schwab account with some index funds for retirement. We want to get a house before I start med school in two years. Hope everyone is great.
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Don’t wait to put something down for major, long term goals because something always gets in the way. I’d have no nest egg if I’d waited until I was out of debt. I’d have little to no college savings for my children if I didn’t start with twenty dollars a paycheck per kid when they were born and just add five dollars a paycheck per year/raise. It’s not always how much, but how consistant and how long you save that becomes the key. I’d rather have $100,000 in retirement going into my 50′s (about $2000 per year for 25 years at 5%) than nothing because I was “waiting” for the right time to start. It’s great when you can add big chunks, but sometimes the small amounts incrementally added over time make a difference as well.
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I vote for making emergency savings the top priority, putting the nest egg a simultaneous second, and saving for the house third. That’s based on life experience plus the 300 or so personal financial plans I wrote about and participated in during my previous career.
I’d like to make a suggestion for stretching your budget too. Give your self a 10 percent pay cut, i.e. build your spending plan as if only 90 percent of your actual income was coming in. I don’t know specifics about your situation, of course, but real life and the 300 plans suggest 10 percent is a doable reduction.
All the best,
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We’ve been saving in our 401K since day 1. I found it’s actually harder to save money AFTER we bought our home.
Even a home in good condition will need $$ spent on it to maintain. You’ll likely want to customize it to your taste. Also, there are many expenses that first year or two that really add up (garbage cans, rakes, lawnmowers, tools, etc…)
That plus rent+utilities is usually cheaper than mortgage+utilities+insurance+taxes, especially if you’re going from a dinky apartment to a normal sized home.
Save now..it’ll only get harder as time goes on. I’m very glad we’ve been saving all along. We’re not where we want to be because of the stock market downturn, but it’s better than having $0.
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“Just because we’d only contribute a small amount right now doesn’t mean it’s an insignificant amount.”
That was my logic when I started both my IRA and 401(k).
I also like this bit from comment #6 –
“It’s not always how much, but how consistant and how long you save that becomes the key.”
I was worried about setting up my 401(k) and “losing” that 4% of my income. Yeah, 4%, and I really do make peanuts. (About $13k a year.) Have I missed it? Well, it’s hard to miss what you never really had in the first place! So much of my pay is based on commissions that I don’t know how much I made until two days before payday for any given pay period.
On top of that, my employer matches the full 4%, so I’m essentially saving 8% of what I make pain-free. Certainly not huge amounts, but I’m also 21… It has decades to grow before I need to count on it. I’m rather proud of it already, anyhow. With the market rebound, it’s already up 13%… Sadly, my husband had no clue what that number meant when I proudly showed it to him. Sigh.
Even with my 401(k), though, I try to contribute a bit to my IRA. I don’t want to have all of my growth in a taxable account, since I have no clue where we’ll end up at retirement age. All told, I’m about $200 away from my $1,000/year contributions goal. I just hope that it’s enough to make a difference later on in my life!
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I’ll chime in on what the others have said. Small amounts are much better than nothing over time. I commend you for saving for your house down payment…a worthy goal. But, time does have a way of speeding by, and you’ll always have something come up, and it’ll be easy to put off the retirement savings for whatever that happens to be at the time.
We have been saving all along. At first, it was small amounts, but as pay raises and other money flowed our way, we added accordingly. Even though the last year was hard to look at the retirment statements, at least there was money there to look at (we’re 47).
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WC – Buying a house is also “paying yourself first”. Or perhaps “rewarding yourself first”.
I don’t have a problem with not worrying about the retirement accounts while you are getting going with home ownership – there is only so much money to go around and houses are very expensive.
I can’t remember how old you are but you don’t look very old – you have lots of time to save for retirement.
That said – if you can put a bit away then that’s not a bad thing either.
Also – I don’t understand the logic behind your statement that you want more home equity because you aren’t moving anytime soon. Is it not desirable to have more equity regardless of the situation?
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@ABCs: “I can’t remember how old you are but you don’t look very old.” Thanks! Much better to hear than, “You look like you needed to start saving yesterday.”
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Totally agree with Sam and the others who say that there’ll always be a reason to put off saving for retirement. IMO, once you set up automatic savings to a retirement account, you are free to do whatever the heck you want with the rest of your money. Now that’s liberating!
I think this is a really thoughtful post as usual from April. I just want to address this bullet point: “While we could make penalty- and tax-free withdrawals from our Roth IRAs (as long as we only withdraw the amount we’ve contributed), our down payment savings is safer in a money market account or certificate of deposit, since we know we’ll need the money in the short-term.”
Don’t forget that you can keep your money in a money-market account within a Roth IRA. This would give you the best of both worlds: Your principal will be safe and you can withdraw it at any time, but you are sheltering the earnings from taxes and you are using your available IRA space in the event you don’t end up purchasing the house.
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I’m in the same boat with you April. My husband and I have put off retirement savings (and haven’t really discussed it much) to save for a house. However, we are probably quite a bit older than you, late 30′s. My employer offers a pension plan, so I feel a little bit more relaxed than if there was nothing to look forward to. However, with the dreadful state of California’s budget, that pension may eventually disappear.
I think I will be looking into a ROTH IRA this week, thanks to your post, instead of putting it off any further.
-Little House
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I think of paying down a mortgage as an indirect retirement savings plan so we pay extra on it each month. If I get that debt paid off before retirement (34 now, our goal is to pay it off by 50), it will be a HUGE cash outlay we don’t have to worry about each month. And we get the certainty that it is gone.
Alternatively, we could invest the extra money and HOPE for the power of compound returns to benefit us over time, but honestly I’m not that sure the market will go anywhere but sideways for the next 10-15 years. Not to say we’re not investing, because we are, I just like the certainty of paying of the debt early more than putting it in the market.
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As the saying goes, “Don’t put off until tomorrow what you can do today.” As the post mentioned, the miracle of compounding is the best reason for putting money toward retirement NOW. Otherwise, you’re missing out on building your retirement nest egg into something more.
My husband and I have always contributed to our 401(k)s at work, and we managed to save for a down payment at the same time. I think it’s wise to save for both retirement and a home, even though it will take longer.
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This is what I suggest. Save for retirement and a house simultaneously. However, instead of shopping for your final home, find a cheaper starter home so you can use less of a down payment. This will allow you to divert more money to retirement while saving up the smaller down payment. Also, while living in the house, you are building equity on a cheaper mortgage, and at the same time you can sock away even more into retirement. And in essence, your equity becomes your down payment on that final home. You’ll be building that up through an expense that you would have anyway without the house, rent.
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Compound interest is a huge positive in saving for retirement, but it works in the opposite way as well. Compound interest is a huge negative while trying to pay off your debt, because interest is accrued on your interest as well.
Mathematically speaking, you are better off paying down your debts before saving for retirement. The interest on your debts will almost always be higher than the interest you earn in savings. Therefore, you end up losing more than you gain. But, if you get a psychological boost with seeing your retirement account grow, then go for it.
Going with safe returns, your savings will not earn more than your debt will charge. Investing on the other hand, gives you a chance to earn more, but are you willing to gamble your future? It’s been said over and over again, past performance does not guarantee future performance.
There is a mathematical approach, a psychological approach, as well as various hybrids of the two extremes. There is no one answer fits all. The answer for you is the one that you are comfortable with and will stick to.
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I don’t see house vs. nest egg as an either/or proposition. Why not both? The bottom line is that savings is occurring.
I recently had a lively debate with my wife about the pros and cons of saving for retirement vs. saving for a downpayment on our next home. Originally, I was throwing everything at retirement, and only paying what was necessary for the mortgage.
As a compromise, in June of this year, I started saving for our next home by paying extra on the mortgage each month. While the idea of having surplus money tied up in home equity may not be appealing to some people, I think of it as a “hidden” investment of 6% (our APR). And I’m beginning to see results: Quicken tells me that I’ve already eliminated two full mortgage payments!
On a related point, I also don’t see Roth vs. Traditional IRA as an either/or proposition. I have both, so I’ll never second-guess myself as to whether I made the right decision.
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I agree that ideally you should save for both.
However, as someone else pointed out, owning a home is another money drain, at least for the first year or two! When I bought my condo three years ago I saw money flying out the door! Why? Because as a friend put it, “Everything ‘works’ in your apartment, but when you move, you’ll discover that you’ll need new stuff you didn’t need before.” And it was true – I had to buy more garbage cans, light bulbs, throw rugs, bath rugs, etc. Random stuff you don’t think of. Basically, buying a home throws your budget out of whack until you settle in to the new normal.
Which brings me to my next point – beef up your emergency fund, too. This is so you have a cushion for unexpected house costs, such as a HOA/Condo Association assessment, broken water heater, etc. And you may want to save some extra cash in a “moving” fund, for paying the movers and buying new items for you home such as appliances or window treatments.
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One thing I dont think I read in this article… the uncalculable gain in paying your house off early. Sure, financially it may make no sense. But I am 32, wife is 31 and in 7 months, our house will be paid off. We have more than tripled our house payment for the past several years. It has not been easy seeing friends take big trips, buy cool stuff, go out to eat often…. but in less than a year we will both feel the freedom to finally seek out careers we love… or sit back and stay at our jobs and let the cash flow in and save for something huge… maybe pay cash for our next house…. I actually stopped putting money in my Roth IRA recently. I lost 20% of my IRA investments (thank you economy) and just put it in a cash reserve and since then I occationally buy gold and silver (not just for investments, but coins are a hobby of mine) and putting it in a simple savingsd account (which is now 3 months expenses for us)… I have thought long and hard about the subject in this article and when it comes down to it, it is up to the individual. For us, paying the house off early would FEEL better than just plugging away at retirment and savings. And the stress-free-ness of no house payment is worth more than any investment percentage to us.
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Retirement is one of these things that people tend not to think about and comes and bite them in the ass.
The earlier you start saving for retirement, the less you have to save for the same result. I think it’s worth putting some other things off a little, it seems more beneficial to me in the long run.
It also help to think about priorities. Everyone who retires still needs money to eat and survive, but not everyone will need to own a house, or a car, or a huge plasma TV. Too many people still invest in these to keep up with the Joneses when it might not work for them. (For instance, if you want to travel a lot, or if you like moving regularly, buying a house might not be for you. It’s worth considering it).
I think the solution you came up with is really good. I’m always for saving for everything at once, as small as the amount ends up being, rather than choose one over the other and possibly regretting it.
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@price: I have to ask WHY you are so determined to buy a house? From the little bit you have shared, I would suggest that it’s not a good idea. If you’re planning to go back to school in a couple years, and especially in an field like med school, it could mean numerous relocations for residencies and an eventual job. Not exactly ideal conditions for home ownership!
There’s a lot of stuff in your life I don’t know anything about, but I would suggest saving up for school and/or a hefty emergency fund, so that you have the flexibility to go where you want without incurring debt.
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Setting up something for yourself on automatic is smart, especially since you don’t have one through work that offers match. Thanks for the Fidelity link, I’ve been meaning to set up a roth IRA for myself and that looks super easy to get started.
Balancing short, medium and long term financial goals has always been difficult for me. Reading this blog regularly is incredibly helpful.
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@ Anne #14
That’s right on. It’s really a no-lose situation contributing to a Roth IRA in this respect. Storing the money in the Roth for now allows you to keep it safe and tax-sheltered.
Another thing, and this may not be applicable to many of the readers here, is that if you fall within a certain income range (Single up to $26,500, MFJ up to $53,000) you can qualify for the Saver’s Tax Credit when it comes time to file next year. It doesn’t get much better than free money just for keeping your money here instead of there.
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I paid off my entire mortgage before putting aside money specifically designated as “for retirement.” I don’t like debt. And, once you pay off the mortgage, it’s a lot easier to save for retirement quickly (so there’s a sense in which by achieving the one goal you are making progress on the other). Part of my reasoning was that stocks were overpriced at the time (this was the mid-1990s). I felt that I was getting a better deal by eliminating interest payments than I would have obtained by buying stocks available only at prices not likely to provide much of a long-term return.
However, I did during the time put money into my 401(k) that was eligible for an employer match. The benefit for paying off the mortgage was not big enough to justify giving up the employer match, even in my eyes.
Rob
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Can you not hold these accounts in an IRA? I’m Canadian, and we can hold these types of accounts in our local equivalents of retirement accounts.
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@Rob Bennett — Just out of curiosity, what would you do if you were making the decision now? House prices haven’t fallen in my area at all, so I can’t help but wonder if I’d be better off investing while the market is low rather than trying to beef up my down payment savings.
@ April — Thanks for this post! I’m in the same boat, except I’m single. I’m finding the comments helpful too!
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Just out of curiosity, what would you do if you were making the decision now? House prices haven’t fallen in my area at all, so I can’t help but wonder if I’d be better off investing while the market is low rather than trying to beef up my down payment savings.
We disagree on the question of whether stock prices can fairly be characterized as “low,” Beth. Certainly prices are better than they were before the crash. But prices are today “low” only in relative terms. Prices were insane before the crash. Today they are just dangerously high. That’s a step in the right direction. But it’s nothing that should make you too enthusiastic about stocks (in one highly flawed individual’s opinion, to be sure!).
My take is that we are likely to see another price crash of at least 50 percent sometime over the next three or four years. After that, stocks will be priced to give mouth-wateringly high long-term returns. If you are absolutely sure that you can stick with stocks despite another price crash that may cause you to be seriously down for a good number of years, stocks might possess a little bit of an edge today.
But it is a rare middle-class person who will be able to stick with stocks through another price crash, in my assessment (the media will be urging us on a daily basis to take all our money out of stocks after Passive Investing has been shown once again not to work in the long run — this is the fourth time we have tried this “idea” and also the fourth time it has caused an economic crisis after it caught on). My view is that you are better off being satisfied with a somewhat lower return that you can realize in the real world than getting excited about the numbers that might apply 10 years out for stocks but that are not likely to be realized by most because of the hell that we are going to have to live through to see them materialize.
After stock prices fall another 50 percent, I will change my tune. When stocks are selling at 50 percent of what they sell for today (stock prices have dropped to 50 percent of what they are selling for today in the aftermath of every other insane bull market we have ever lived through), they will truly be offering a far better deal than could be obtained by paying off mortgage debt.
People often say that I don’t like stocks. Nothing could be further from the truth. I see stocks as the ticket to financial freedom for the middle-class worker. What I don’t like is overpaying for things I buy. I don’t like overpaying for houses or cars or comic books or bananas. Or stocks. The patient investor buys stocks at reasonable prices and obtains an amazing long-term value proposition by doing so. Those who overpay often find themselves forced to sell at the worst possible time for doing so because of the “surprise” they experience when stocks perform once more just as they always have going back to the day on which the first market opened for business. It is the belief that prices don’t matter — Passive Investing — that causes stock crashes and economic crises. For so long as a large number of people believe that Passive Investing can work, stocks will remain dangerous, in my view.
Rob
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You need to remember what the point of a house is. It is an investment, just like the Roth, except instead of recieving dividends or interest in the future, you will not need to pay rent. The house should be treated just like other investments, so in light of that, I would recommend seeing the ROI on the house vs the ROI on your Roth/IRA. Depending on how old you are it might not even make sense to own a house, especially if you are planning on having a mortgage and paying interest at all.
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We had a similar issue recently regarding a mortgage refinance. I’m 42 and we have a 9 month old at home, and we decided to bite the bullet and refinance our 30 year 5.75% (fixed) mortgage into a 4.375% 15 year fixed (I know this issue was addressed in another post by JD but it’s relevant here as well).
We have about 15% of our income going into retirement and we were paying extra on our mortgage and we just opened an Education IRA. We’ll be about the same cashflow-wise before and after the refi, but now we’re “committed” to having the house paid off by the time the kiddo is starting to consider colleges. That was the deal clincher. I’ve seen people in their late 50′s-early 60′s struggle with financial COMMITMENTS and I don’t want to be in that boat. Freedom and choices are important.
I think that not having a house payment as you approach retirement is a huge win financially and psychologically, even if the rate of return may not be as large as it would be by socking a few extra bucks into a 401(k) or Roth.
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I’m confused about your Roth IRA — are you putting the $200/mo into stock? How much does it cost each month in commissions? It seems to me that would eat up the benefits pretty quickly…
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I am 51 now, always single, and here’s part of my story:
I saved like mad in my twenties, accumulated a full year’s salary, and bought my first house by myself, with my own money, when I was thirty. Down payment ate up most of the savings. During that decade, I changed jobs right before I was vested. Twice. Ouch.
Didn’t start an IRA, as I was busy saving for a house.
In my thirties, I started a job that had a profit sharing and 401k program. I began at 6% and worked my way up to 10%. I sold the first house, moved and bought another in my new, more expensive area.
During my forties, I made a ton on my second place. Sold it and bought something better, which I could not have afforded without the appreciation on house #2. Became self-employed and started a Keogh account. Bought an investment property in the area I’d like to retire. Eventually went back to being an employee with a 401K, saving 10%.
To paraphrase Charles Schwab, “I’m Fifty, Now What?” I have two nice properties, both with 40-50% equity. A big, fat emergency fund and not nearly as much in retirement accounts as I’d like.
Here’s the key: It’s what you do with the savings that matters. I have an easier time saving money than investing money. Some years, my Keogh contributions simply sat in Money Market accounts. AAACK! So, save what you can, but more critical: invest it wisely for future growth. CD’s and MM’s will not move you into a comfortable retirement. Also, pay attention to things like Roth IRA’s. You can’t go back and make up for the years that you didn’t contribute, so try to take advantage of a Roth each year, even while you’re saving for the house. Compound interest is your friend.
As to taxable (401k, Keogh, SEP)) vs. non-taxable (Roth) retirement savings: in general, pay the taxes now! Taxes always go up and over time earnings usually do too. When I look at pay stubs and tax returns of 10-20 years ago, I’m amazed at how little I was earning in comparison to now, and therefore, how small my tax liability was.
Pay the taxes, save earnestly and invest wise wisely for the long term. Keep reaching for your goals. Best of luck to you, you’ll get there!
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My partner and I are in a similar situation, except we already bought the house and now have to decide which is the best place for our extra cash: mortgage premium payments, student loan payments, or retirement?
We are very close to having our emergency fund finished (equaling about what we’d need to live off of if both of us lost our jobs for 6 months). But once that’s done, where does the money go?
Facts to consdier:
-My student loans (he doesn’t have any) aren’t in repayment until at least May 2010.
-My employer contributes the equivolant of 10% of my salary to a retirement account (Vanguard stock targeted account) regardless of my contribution, but I can add another 10% if I’d like.
-We have no other retirement savings.
-We love to travel and would like to save for several big and medium sized trips in the coming years.
-We currently save about 20% of our post-tax salary at the beginning of the month and checkbook sweep anything that is left at the end of the month into our emergency fund.
Right now our plan is to finish off our emergency fund through the end of 2009. Use our $8,000 tax credit to open and max out a Roth IRA, add some money to the “vacation fund”, and… ??
So (if all goes according to plan) at the beginning of 2010 we’ll have 20% + checkbook sweep to go somewhere, a maxed out IRA, a 10% no strings attached employer contribution, student loans that are not yet in repayment, a mortgage, and an itch to travel.
Where would you allocate your funds, GRS readers?
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I just signed for my first job out of what you USians call “grad school” (not that I’ve finished my thesis yet but…, well, we won’t go into that, will we?). I actually worked between my first degree and going back to do my doctorate, so I have a (small) pension account from that, and I was rather pleased to note that my new employer will not only match, but more than match my contributions at my new place. Result! Surely a no-brainer? Especially as my new income (even post-tax) is more than double what I’ve living on for the past four years, and I don’t intend to inflate my lifestyle to match.
So I was rather surprised when halfway through the paperwork-signing session with HR, I was asked if I wanted to opt out of the pension scheme? Say what? Um, no! I guess it is better to opt people in and force them to opt out if you’re trying to encourage participation, but it felt like a “now you’re in a signing forms mood, just please sign away your entitlement to this fantastic pension scheme”.
Fear not, I didn’t sign.
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I would say it really depends on the upside in your area re; real estate.
Good luck!
Doing both is best. BUT if housing prices have dropped in your area I would expedite the down payment. You may never see prices this low. Again, depends on your area.
I bought our first house 19 years ago for $250K with a 20% down payment and today, AFTER a 30% drop in our area, is worth $975K.
Had we not bought at that point, where would the retirement funds be now, presuming they were in the market? I think the data is very specific to markets.
So do both but be prepared to be flexible based on your specific data.
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In response to your question: I would save for both. I have multiple accounts for different savings goals.
This is a side note but I’m mentioning it because staff writrs are a new thing around here and I believe in constructive criticism. I think it is alienating for you to say “If i save JUST $200 each a month…” “I think we have enough room in our budget to come up with a few hundred dollars each month.” That’s a lot of money for a lot of people. And while it may be easy for you to find $400 extra in your budget each month, many people (myself included) would have a hard time doing that in this economy. I wouldn’t want people to read that and think “I can’t save that so this doesn’t apply to me, moving on.”
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I would go with the retirement. The house is an upgrade, retirement is so you can keep what you have. Saving for retirement will probably be even harder once you buy that house. Now is always the right time to save for retirement.
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I’d suggest looking again at the tax advantages of pulling money out of your IRA for a house down payment. You don’t need to choose risky investments in your IRA… they can be just as safe as a money market fund. The tax advantages could really jump start your 20% goal.
Also – there is a significant federal credit ($8k) being offered to first time home buyers right now. You must purchase your home before Dec 1, 2009 to qualify. Think about how long this credit would cover your PMI!
I like your goal of 20% down to get rid of PMI but this federal credit is really too good ignore…
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@30 Rob Bennett (I kind of diverge from this post after a couple paragraphs.)
BTW, the market crash wasn’t caused by passive investors per se. It was caused by ex passive investors who panicked and sold their stock, disregarding the price and the implications of their action. As the prices continued to drop, the more risk-tolerant passive investors panicked and repeated the same mistake. Repeat over and over again and you get the stock market meltdown.
It seems people want large returns and low risk. Although the two are not mutually exclusive, it is rare to overlap. If you have money that you cannot afford to lose, you shouldn’t be gambling it away.
What you speak of, active trading, is trying to time the market. I don’t forsake active trading, and I’m guilty of doing it, because I’m a gambler at heart. But, I draw the line when it’s money I will NEED. My retirement account is pretty much on autopilot with me maxing out my company match into a 401k and Roth IRA.
I personally bought a few thousand stocks in Dec and recently sold it at a nice profit. I took a gamble that paid off by trying to time the market.
With my expenses paid, retirement account filled, and random savings goals attained, the extra money was suppose to go to paying down the principle on my student loans.
The money I bought stocks with was in a separate account I saved money in after I got a job. This money was a monthly “payment” for my student loans during 6 month grace period after graduation. I had originally planned to pay down my principal before the grace period ended, but I took the risk and used it to buy stock.
This money was not money I needed to pay the bills. I could have lost all of my investment, and still be fine. I would have cried like a little school girl, but I wouldn’t be in financial trouble. I would still be on track to pay all my bills, finish paying off my student loans in a few years, and not break a sweat. But, my gamble paid off and I paid off the loans in a few months.
In the end, I think the idea of putting your life/retirement savings to the roll of the dice is something that needs to be reevaluated. There is evidence that stocks go up over the long run, but once again, past performance is not a guarantee for future performance.
If your risk tolerance is low, the only money that should be gambled is discretionary type, if any. If you are comfortable with taking a huge hit, for the chance at increased returns, then go for it.
Stock market crashes are the good, not perfect, indicator for your risk tolerance. Like the first people to exit the stock market are either psychic or too quick to act. Those who rode out the crash are either very risk tolerant or too lazy to do anything.
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I think you should set up retirement now because of affordability. You should be buying a house based on being able to afford a 20% down payment and monthly mortgage payments AFTER you’re meeting your savings and retirement goals. Save up to buy things… even a house! Sure you will still take out a mortgage, but you will have saved up for the down payment (and hopefully a nice cushion for things like maintenance, unexpected house expenses and irregular expenses such as house furniture, etc).
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I haven’t read through all the comments so I haven’t read what other people have said, but I would at least be putting something away for retirement while trying to save for a house.
I can’t tell you what I wouldn’t give to have a few extra hundred dollars a MONTH of wiggle-room in the budget! I am a stay-at-home mom with a family of four living on one income in San Francisco, one of the most expensive cities in the country.
Due to the recession and the high rate of unemployment, our first priority is to get at least six months of savings put away and our car paid off. Six months of savings for what we need, especially just to pay the rent, is an obscene amount of money here. If my husband were to lose his job, we’d need those savings, since we don’t have another income to fall back on. We want the car paid off, not only so we can be debt-free (it’s the last thing standing in our way!), but (1) so we can keep it if he loses his job, and (2) so we can free up the amount we’re putting toward the car payment (which not only frees up a few hundred dollars, but also reduces how much we would need to live on each month). We’re about 60% of the way toward savings, and it looks like we should have the car paid off by March, two years early.
Once those two things are taken care of, then retirement is next before something like saving for a house. We could probably chip away at all three – car, savings, retirement – but our two top priorities would take longer, and the current economic climate is just too nerve-wracking. My husband doesn’t have retirement plans through his work, and while we’re looking forward to getting the ball rolling and putting money away for our future, we believe that the best things we can be a steward of at the moment are these two small children we have, so making sure we have sufficient savings and reliable transportation are our top priorities. While I firmly believe we protect our children by having sufficient retirement funds for ourselves, it would be the height of irony to save for that while neglecting the other possibilities of not having enough money to support them now.
So that’s where we’re at.
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@sandycheeks–The $200 comes from the Fidelity offer I mentioned that requires us to automatically contribute $200 per month, otherwise there is a $2,500 minimum initial deposit, which we can’t afford right now. This is just my personal situation. If we only could save $50 or $20 per month for retirement, we’d still be taking this route. Our salaries are pretty average, and we’ll have to cut back in some areas and possibly save a little less in other areas to make it work. Everyone’s financial situation will be different.
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“We aren’t eligible for any employer contribution matches.” Gag. People can’t be blinded into believing that “retirement savings” is ONLY if its in an IRA/401k/403b or only if “matched” etc. Savings=Retirement if that is what you have earmarked it for! There is nothing wrong with opening a mutual fund and call it your retirement savings!
Also, I am in the camp that you have to diversify is ALL sense of the word. You can’t JUST save for house, just save for retirement, just pay off debt. Put a little in each bucket and you get traction quicker than you think on ALL fronts….
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@ Rob Bennett — thank you for the response and the information. It’s always helpful to have another perspective.
I think GRS is the only site were I read so many comments
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Why in the world is home equity interesting if you don’t plan on ever selling the home?
I think I’ve settled on this as my general savings plan for now:
1) 4% pretax-contribution (which maxes out my employer 50% match at an effective 6% contribution) to my 401k.
2) 15% post-tax ESPP contribution. No one ever talks about ESPPs on these sites, presumably because they’re not offered by very many employers, but mine is a *fantastic* short-term investment strategy. All contributions have a guaranteed 15% return for the first 6 months (and possibly more), at which point you can sell them and invest the money in anything you like (including cash).
This adds to 19%, but it’s really something more like 24% of my pre-tax income. Most of it is *not* going to retirement, but I want to buy a home in an expensive part of the country (where I currently rent). I expect a 20% down payment to be about $100k. I don’t want to wait 15 years just to amass a down payment, so I’ve decided that I need to put more effort into saving for a house than saving for retirement if I want to buy the house before I retire.
The idea is to move some of the current down-payment savings over towards retirement savings after the down payment fund is established.
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“We don’t plan to move from this home, so we like the idea of immediately having a substantial amount of home equity.”
I second Tyler’s question of why you are so interested in having equity if you don’t plan on selling. That is completely backward logic. The only time you need to be concerned with how much your house will sell for is if you are going to sell it.
(Not that I’m advocating against a large down payment, far from it. I just seems like your reasoning is off.)
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@Tyler and Des–We want to avoid PMI and pay off the house as soon as we can, so for us, there’s a financial incentive and a psychological boost to having a subsantial amount of home equity. I probably wasn’t clear since I didn’t mention the part about paying off the house early.
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Something I didn’t see mentioned above is that contributing to your retirement accounts will HELP when you go to purchase a home by adding to the assets side of your loan application. The balances in these accounts are taken into consideration along with your other assets and liabilities. Sometimes the retirement assets can be difference in getting approved or declined when the underwriting systems run the ratios. If your credit is good and you have decent to significant assets in savings and retirement accounts, it can be the difference between getting an approval with just a few hoops to jump through and getting an approval with lots of hoops to jump through. Lenders want to know that you can still make your mortgage payment for a few months even if one of you lost your jobs.
You didn’t talk about what your budget looks like but a suggestion that is often made to 1st Time Homebuyers is to figure out what your monthly mortgage payment would be for the size house you are looking to buy along with taxes, insurance and utilities. A good mortgage banker / lender can help you with this. Then look at your current situation and add up rent, renter’s insurance and utilities. The difference between the two should automatically go into savings so that you get used to “spending” each month what you will be spending on your new home. This helps prevent new homeowners shock and helps put money aside for the down payment and closing costs.
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