How bad is it really to put homeownership goals first?
Fidelity Viewpoints
Key takeaways
- It can be tempting to switch off retirement contributions while saving for a home. However, always try to continue saving enough to capture the full amount of any employer match.
- Scaling back retirement savings may be detrimental if you're stretching to buy a house beyond your means.
- Remember that building up a large down payment isn't the only tool you have. Improving your credit score can also have a big impact on affordability.
Becoming a homeowner is a dream for many people and families. Owning the roof over your head can provide a feeling of greater stability and security for both your finances and life. A home is not just a place to live, but can be a place to love, depend on, and eventually pass on to future generations.
But to make that dream a reality, it typically takes some sacrifices. Buyers often find they must accept a house that doesn't meet every item on their wish lists. And given sky-high home prices and rising interest rates, many buyers find they have to do some serious belt-tightening and financial stretching just to get into a house at all.
When facing the real costs of getting into the market, buyers are often left scrambling to free up cash. Retirement contributions, in particular, may look like low-hanging fruit because you can reduce or even stop contributions without feeling any pain in the here and now.
Of course, just because you don't feel the pinch today doesn't mean it won't hurt. But exactly how significant an impact it may have on your retirement plan can depend on the specifics of your situation.
If you're considering reducing or switching off your contributions and wondering how severe the impacts may be down the road, read on for our take on the potential consequences in a few common situations.
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What if you give up an employer match?
Missing out on your employer's match so that, say, you can beef up your down payment or accelerate mortgage payments is generally not advisable. Any match you receive is a bit like "free money," and capturing it can be a vital tool in your retirement-saving plan.
For one thing, a home cannot offer that same "free money" potential. For another—even if you make up for your missed retirement contributions later on in life, you will never get a "do-over" at capturing those lost years' matching contributions. You will have forfeited that money (and any potential return you could have earned on it) forever.
For those reasons, try not to miss out on your match while saving for a home or paying down your mortgage (even if getting your employer's match means you can only save up a down payment of less than 20%, and so must pay for private mortgage insurance).
What if you're buying a bigger vs. smaller house?
How much house you buy can potentially have a major impact on the health of your retirement plan. Essentially, reducing retirement savings because you're buying a very expensive house may leave you worse off in the long run. But reducing contributions so that you can buy a "just right" house doesn't have such a negative impact.
Fidelity generally advises considering a home valued at 3 to 5 times your household income (read more about how much house you can afford). If you stretch much beyond that 5-times figure, more and more of your household's monthly cash flow will get eaten up by housing costs—potentially hampering your ability to save for retirement for years to come. While some of that money will go toward building equity, much of it will also go to taxes, maintenance, utilities, and mortgage interest, which do nothing to boost your net worth.
A word on our assumptions
Our conclusions are based on a comparison of modeled outcomes. To assess the impact on retirement income of putting more money toward homeownership versus more money to retirement, we generated a range of hypothetical scenarios and compared estimated retirement income against estimated borrowing costs on a home. We did not consider the value of home equity as part of the analysis.
Our analysis assumes that buyers have already completed a rent-vs.-buy comparison and determined that buying is appropriate (i.e., we are comparing buying more house to buying less house, not comparing buying against renting).
What if you're closer to retirement vs. further?
All else equal, the closer you are to retirement, the worse the potential impacts of reducing savings.
If you're saving for a home and dial down your retirement savings while you're younger, such as in your 20s or 30s, then you still have time to catch back up—by contributing more, over the rest of your career, than you otherwise would. (Plus, if you can break into ownership during those years, then your housing costs may be lower later on in your career, potentially freeing up more cash for savings.)
By the time you're in your 40s or 50s, however, you may not have enough time to catch up. That's not to say you've missed the boat on ownership, but it means it's even more important to keep hitting your retirement savings goals while you're working to get into the market (read more about how much to save for retirement).
Aim to strike a balance
Rather than focusing only on a home or only on retirement savings, try to find a balance in working toward both goals.
A measured approach may mean continuing to capture any retirement match, sticking to a home that's within your budget, and being extra careful not to sacrifice savings as you get closer to retirement. It may also mean buying a home that you plan to live in for the long run—letting you build equity, avoid transaction costs, and benefit from potential home-price increases for a longer period of time.
If you're struggling to meet your down payment goals while still capturing the employer match, take a step back and reevaluate your strategy. Remember that it is still possible to buy a house with a down payment of less than 20%. Improving your credit score can provide powerful benefits in reducing your borrowing costs—helping you qualify for lower interest rates on a mortgage and lower rates on private mortgage insurance—both of which can make your monthly payments more affordable. Plus, you can work on your credit score without putting a single dent in your retirement savings.
While it can feel easier and simpler to focus on only one financial goal at a time, the better approach is often to try to keep making progress on multiple goals at once.
