Which comes first: the house or the nest egg? Saving for a down payment on a house can compete with retirement savings. If you don't have a traditional pension, retirement is a do-it-yourself affair that requires sustained saving over a lifetime. But for young families, more immediate goals like purchasing a first home seem more pressing. Here are some strategies to help you buy a first home without compromising your retirement security.
Get your 401(k) match. Most financial advisers say that saving for retirement—at least enough to claim your employer's 401(k) match, if your employer offers one—should be your biggest savings goal. "A plan that matches 50 percent of your contributions translates into a 50 percent instant guaranteed return after taxes. That's the best investment you can find," says Beth Kobliner, author of Get a Financial Life: Personal Finance in Your Twenties and Thirties. Try to allocate at least some of your savings to a tax-deferred retirement account. "I recommend that people strive to save 15 percent of their gross income with 5 percent earmarked for nearer-term needs like a home down payment and 10 percent for retirement," says Manisha Thakor, a financial adviser and coauthor of Get Financially Naked: How to Talk Money With Your Honey. "Save twice as much for retirement as you do for your house in your 20s and 30s because the money you save early on for retirement is the most valuable, whereas having to wait an extra five years or 10 years to buy a home in the grand scope of your life isn't going to ruin your life. Having to choose between food and essential medicine in your golden years just might."
Accumulate the down payment. A marriage or impending child often creates a powerful emotional incentive for immediate homeownership. Some people put retirement savings temporarily on hold to put together a down payment for their first home. "If someone says, 'I need to buy a house in the next three to five years,' versus 'I need to retire in 35 years,' the bulk of their resources should go toward the shorter-term goal," says Michael Kay, president of Financial Focus in Livingston, N.J. "Once they get one thing accomplished, they can then put more resources toward their other goals." Thakor recommends that prospective homeowners round up a 20 percent down payment before buying and limit the purchase price of the home to three times their household income.
Tap retirement accounts with caution. Uncle Sam waives some of the usual retirement account early-withdrawal penalties for new home buyers. If you use an IRA distribution to purchase your first home before age 59½, you don't have to pay the usual 10 percent penalty on up to $10,000 worth of distributions. Spouses who are both first-time home buyers can withdraw $20,000 without penalty. Some 401(k) plans also allow participants to borrow up to 50 percent of the vested account balance up to a maximum of $50,000 to purchase a first home and work out a loan repayment plan. But be aware that by tapping retirement accounts early, you are missing out on decades' worth of tax-deferred growth. "Though it's true that many companies allow you to borrow against your 401(k), I wouldn't do it for a down payment," says Kobliner. "If you lose your job, you'll have to pay back that loan quickly, and if you don't have the cash, you'll be hit with taxes and penalties."
Don't buy without an emergency fund. Don't sink every cent you have into a house down payment. Make sure that if one of you should lose your job, you could get by on savings and one income for long enough to find new employment. "Before a couple purchases a house, they need to have a sufficient emergency fund of cash to carry them, in this economy, at least a year," says Kay. "We want to make sure there is enough security so if something bad befalls them, they are properly protected."
Budget for other homeownership expenses. Homeownership has a slew of other costs besides principal and interest payments. Make sure you factor into your calculations property taxes, homeowner's insurance, maintenance costs, and even homeowner's association dues. The costs of selling a home if your job or personal life draws you to a new locale are also high. "Don't buy a house until you know you are going to be in one place for several years," says Lisa Brinig, a certified financial planner for CBIZ Wealth Management in San Diego.