Which comes first: The house or the nest egg?
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?