If you’ve just about saved enough for a down payment, how much do you need for all the extra expenses that come up in the home buying process? And is reducing your retirement contributions in the short term worth it? That’s what we’re thinking about this week.
Each Monday we’re tackling one of your pressing personal finance questions by asking a handful of money experts for their advice. If you have a general question or money concern, or just want to talk about something PeFi-related, leave it in the comments or email me at email@example.com.
This week’s question comes from Wil:
My husband and I are finally looking to buy a house in a year to 18 months. The area we want to buy is *just* beginning to see some movement, so we won’t want to wait too long lest it become as unaffordable as everything else around.
While we have an adequate down payment saved (almost), I want to be sure that we keep plenty of liquid cash on hand for all the little things, plus life in general. We currently contribute at a relatively high rate (12 percent) to the 401(k). Is it a good idea to temporarily reduce those contributions for a year or so to help pad the bank account for the home purchase? (We wouldn’t drop below the employer match percentage, of course!)
This is what individual experts have to say generally about an issue that affects each person differently—if you want personalized advice you should see a financial planner.
Get Your Financial Priorities Straight
Congrats on taking this next big step! It sounds like you’ve thought this through, and are leaning toward reducing your retirement contributions. There’s nothing necessarily wrong with that—it’s better than digging yourself into credit card debt, for example, because you didn’t foresee some expenses and you don’t have enough liquid assets to cover them. But let’s go through all of your options to make sure.
Clearly you know how to make sacrifices—saving for a down payment while still contributing in the double digits to your retirement accounts is an impressive feat. If you’re looking for a specific number to hit before you start diverting funds to your house, LearnVest Founder Alexa von Tobel says “generally, people should be on track to replace 70 percent to 85 percent of their pre-retirement income in retirement before they start saving for a down payment.”
That said, at the end of the day, there’s only so much money to go around, and only you know what your priorities are. So if buying a home is your dream and it will bring you more satisfaction than retiring a year or two earlier, that’s something to consider. Likewise, you might be able to ratchet up your savings in the next year or so after you have everything squared away with your house.
“Yes, it’s fine to reduce 401(k) contributions for a while to meet a worthwhile goal. Buying a first home is a worthwhile goal. So is making sure you have rainy-day savings to pay for the inevitable home repairs and other homeownership costs, plus, as you say, for ‘life in general,’” says Holden Lewis, Nerdwallet’s home expert. “Eventually, when you know you can afford to, you can return to your former level of retirement savings. Meantime, you’re right to contributing enough to capture the employer match.”
On the other hand, if you’re on the fence about buying a home, or would need to significantly reduce your retirement savings to save enough, try cutting other extraneous costs while still contributing to your retirement accounts for a few months. Put those reductions in a separate high yield savings account earmarked for the home buying process, and build up your safety net that way.
Instead of focusing on an arbitrary buying timeline, focus on gradually building up your emergency fund in a way that doesn’t put too much stress on you and your husband. There’s no “right” time to buy, after all. It might take a bit longer to get there, but you’ll be better off—both in the short term and in your retirement.
How much do you need to put aside? Of course, it will depend on where you live, the size of the mortgage and a million other variables you can’t foresee. But according to CNN Money, homebuyers tend to incur between $2,000 and $5,000 in surprise expenses. So work that into your budget, and see if there’s flexibility outside of the 12 percent you’re putting away for retirement. You’re in a good place in terms of retirement savings—don’t you want to stay there?
If that’s too difficult to do, then you can dial back your retirement contributions. “Remember that saving for retirement isn’t your primary goal; living a wonderful life together is your primary goal,” says Lewis. “For you, a wonderful life includes owning a house and not stressing about the bills afterward. Pursue that goal with gusto, then you can go back to saving for retirement.”
This article was written by shared by Alicia Adamczyk to Lifehacker and Alicia Adamczyk on Two Cents from Lifehacker