Balancing Saving for a House and Retirement: Finding the Right Approach

Managing your finances often feels like juggling flaming torches, especially when deciding between two equally vital goals like saving for a house and retirement. Which one should take priority? Should you put all your energy into securing the keys to your dream home, or should you ensure your golden years are actually golden by understanding your annual income needs for retirement?

Spoiler alert: there’s no one-size-fits-all answer, but with the right strategy, you can strike a balance between the two. Walk through the steps to deciding where to focus your hard-earned dollars.

What Do You Need to Save?

They say you can’t put a price on peace of mind, but both retirement and homeownership carry hefty costs. Let’s start by looking at what is generally recommended for these two important life milestones.

For Retirement

Experts recommend aiming to have one year’s salary saved for retirement by age 30. By age 40, that should be three times your current income.

While this is a general guideline, lifestyle goals, expected retirement age, and living costs in your desired location can change this metric. A common rule of thumb is to save 15% of your income annually, including any employer contributions to a 401(k) or similar plan. Prioritizing employer match contributions matters, as they are essentially ‘free money’ that can boost your future benefits.

For Buying a Home: Down Payment

Saving for a home requires a clear understanding of your target budget, financial situation, and housing costs. Start by aiming to save at least 20% of the home’s purchase price for the down payment. Putting this much down helps avoid private mortgage insurance (PMI), get better interest rates, and reduce monthly payments.

Additionally, account for closing costs in the home purchase budget. These typically range from 2% to 5% of the home’s purchase price. Remember to build an emergency savings buffer to cover unexpected expenses during or after the buying process. Use budgeting tools and set up a dedicated savings plan to track your progress and ensure you’re consistently working toward your home ownership goal.

The one caveat is you don’t necessarily need 20% down to buy a house. Some loan programs allow for as little as 3% for qualifying homeowners. 

Saving for Retirement vs. a House: What Comes First?

Deciding what to prioritize first largely depends on your circumstances, but it helps to look at the arguments for both sides.

The Case for Prioritizing Retirement

Retirement planning is like planting a tree. The earlier you start, the taller and more flourishing it becomes, thanks to the magic of compound interest. Starting in your 20s and 30s allows your money to take advantage of the time value of money. Essentially, you allow compounding interest to work in your favor, potentially turning even small savings into a sizeable nest egg. 

If you save for retirement later, your palm tree might look more like a bonsai. While skipping retirement contributions might provide short-term financial relief, it ultimately results in a loss of net worth growth in the long run. Consistent retirement contributions grow savings over time. 

Use retirement calculators and financial planning tools to set a budget and figure how much to fit your needs.

The Case for Prioritizing a House

Home is not just a place to live but an emotional and financial investment that provides stability and security. If you’re in a hot real estate market where housing prices are climbing faster than your favorite stock, locking in property sooner could give you a serious financial leg-up. Plus, owning a home saves you from the rental market rollercoaster. 

Additionally, the earlier you purchase a home, the sooner you build equity and add to your net worth. That can be helpful when planning for retirement, as you can use that earned equity for various reasons. For example, a down payment on your retirement home, paying for aging-in-place renovations or passing on generational wealth to heirs.

However, consider the impact of mortgage interest on your long-term financial planning. Higher mortgage interest on a larger or more expensive home may leave you with less cash to contribute to retirement, affecting your long-term financial security. 

What to Evaluate In Setting Savings Goals

Before you pick sides, take a good look at a few factors:

• Age: The younger you are, the more interest works in your favor to build cash savings.
• Income: Higher income may allow you to split your savings more effectively between the two goals.
• Debt: High-interest debt (like credit cards) should be paid off first before focusing on saving for either goal.
• Market conditions: Is the real estate market favoring buyers or sellers? Are interest rates appealing? Favorable interest rates or a buyer’s market make a stronger case for buying now rather than waiting for later.
• Future generations: Consider the long-term benefits of homeownership, not just as a financial investment but as a means to provide stability and security for your family. Owning a home can create a lasting legacy and be a valuable asset to future generations.

Home Equity vs. Retirement Savings

Some people see home equity as a fallback plan for retirement, but it’s not always as reliable as it seems. Look at the pros and cons of both.

Building Wealth Through Home Equity

Equity is the portion of the house you own outright. Every mortgage payment builds equity in your purchased home. So do rising property values (hopefully) over time, making ownership a tangible wealth-building tool. 

Down the road, you can tap into your home’s value through downsizing or selling. Use equity to fund home renovations, a college education, or start a business. Just remember, a house isn’t exactly a liquid asset. You have to sell it or open a line of credit to access the cash, which leaves you renting a place to live.

Retirement Savings Are More Flexible

When it’s time to retire, liquidity is key. No one wants to sell their home to pay for groceries or medical bills! Unlike home equity, a retirement account, such as a 401(k) or IRA, offers more flexibility. The terms allow vested retirees to withdraw funds as needed. Diversifying your financial safety net with varied retirement savings gives you options that home equity alone may not provide.

Risks of Over-Relying on Home Equity

Relying too heavily on home equity comes with risks. Housing markets can be unpredictable, and property values don’t always rise. Properties must be kept in good shape and situated in thriving areas to have the best chances of appreciating. Additionally, ongoing property maintenance costs and potential market dips impact the value of your “nest egg.” 

While homeownership is a fantastic investment, it shouldn’t be your sole source of retirement savings. Use a measured approach to build sources of retirement income for a balanced and secure financial future. 

How to Balance Saving for a House and Retirement

Balancing these two goals may feel like walking a financial tightrope, but with some thoughtful planning, you can get there. 

1. Set Clear Goals

Start by identifying your short-term and long-term priorities. Ask yourself these straightforward questions:

• Do you want to own a home within the next five years?
• When do you want to retire?
• How much will you need to retire comfortably?

Mapping the timelines helps you decide how to allocate your savings now and in the future.

2. Budget Effectively

Create a budget that reflects both goals. If your sights are set on a down payment, direct funds there while allocating at least a base level to retirement savings. Prioritizing employer-matching contributions is a smart financial move that ensures you’re not leaving free money on the table and helps secure significant long-term growth in your retirement savings.

Estimating your retirement income needs by projecting future expenses. Compare them to current income to design a framework for managing your retirement finances effectively.

3. Optimize Savings Accounts

• Use high-yield savings accounts to build a down payment while benefiting from interest growth.
• For retirement accounts, consider Traditional IRAs, Roth IRAs, or 401(k)s to leverage tax advantages and maximize long-term growth.
• If you have access to employer-sponsored plans with matching contributions, prioritize maxing out that free money as it is a smart financial decision.

4. Invest Wisely

Save for retirement or your future home with investment options that align with your risk tolerance and timelines. A diversified portfolio helps your money grow while minimizing risks. The closer you are to retirement, the more money you may want to contribute or shift to higher-risk stocks or accounts to pad your funds.

Making the Right Decision for Your Situation

The choice between saving for retirement or a home ultimately depends on your financial situation and stage of life. A few final pointers to help guide you:

Evaluate Your Current Financial Health

Take stock of your savings, income, debts, and expenses. If you don’t yet have an emergency fund (3-6 months of living expenses), start there before tackling other financial goals. Buying a home or saving for retirement won’t matter if you can’t cover essentials now if you lost a job or faced financial hardship. Additionally, evaluate your retirement savings goals to ensure you are on track. Balancing these goals with other financial priorities.

Tailor Your Approach

In some situations, you may need professional advice. Consider speaking with a financial advisor to tailor a strategy that balances your saving priorities with the potential consequences.

Stay Flexible

Your financial situation and goals will change over time. So do economic market conditions. During some periods, it is better to invest in markets and others to buy a home. Revisit your strategy annually to adjust as needed to reflect life events, shifting market, or income changes.

Answer: Build Your Nest and Nest Egg

Deciding between saving for a house or retirement feels like choosing between avocado toast or a 401(k). But why not enjoy both? With a balanced approach and smart tactics like budgets, savings accounts, and employer plans, you can have your dream home and still retire in style.

Remember, it’s not about racing to the finish line of one goal. It’s about creating a financial plan that allows you to build the life you want—not just for today but for the many tomorrows to come.