Should You Save First for Retirement or a Down Payment on a House?

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Clever Real Estate

Updated 

November 1st, 2019

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Should you save for retirement or buy a house first? What is the better choice for your financial future? Brian Meiggs from My Millennial Guide digs into what's the better decision for you.

Many people wonder about saving money, and the best ways to get ahead financially. A critical issue when it comes to saving money is often whether to save first for retirement or a down payment on a house. These two options may conflict for those who have a limited amount of money to save.

Both saving money for retirement and saving for a down payment on a house are important. Which of these is most important depends on several factors and your own personal goals toward financial security. There are pros and cons to both sides. Here are some of the things to consider when making this decision.

Saving for Retirement First

First, saving money for retirement comes in many forms. Some people choose to put aside money in a regular savings account, which can be helpful, but this money won’t really grow at any rate to be especially helpful—unless you are very young and can afford to put away a substantial amount of money each month toward your retirement goals.

Other people have the option of having an employer set up a 401K or other type of retirement account, which will grow far more quickly than a regular savings account. The stock market can offer many opportunities for growth, yet it can also be quite volatile, meaning that those who don’t have enough time to be patient when the market fluctuates may be putting their money at risk. For those who are not in a position to wait out the potential fluctuations in the stock market, saving for retirement can be tricky. You may be putting all of your money at risk, hoping that you will make significant gains, only to find out that the market takes a dive and you have to wait years to recoup those savings.

Still another option, you could set up your own retirement account, such as a Roth IRA, which can be expected to provide steady growth over a period of years. The Roth IRA accounts are typically not the type of accounts that have matching employer contributions.

Saving for a Down Payment on a House First

Saving money for a down payment on a house can also have many benefits. Owning your own home can offer opportunities for growth in terms of real estate equity, depreciation, and tax benefits. Plus, you get the security of knowing where you will live for the long term, and you won’t be paying rent or face the possibility of eviction, not having a lease renewed, or having your rent increased.

On the downside, owning a home can be expensive, with unexpected repairs, tax increases, or changes in your income that impact your ability to satisfy the requirements of paying your mortgage. Plus, owning a home may offer tax breaks and increases in value, but owning a home does not generate any income (unless you rent space out).

Security and Financial Growth

For many people, just like making money is an emotional experience, so is saving money. Knowing that you have a “nest egg” can provide tremendous security, whether you are planning to use the money for retirement or for a down payment on a house. For those who have employers that match their retirement contributions, reducing or slowing those contributions can have exponential effects later on the amount earned on that investment. Plus, who wants to leave free money around? This is exactly what you are doing if you are not maxing out your retirement contributions (or contributing as much as you are able to) when you have matching employer contributions.

How Long Do You Have?

Obviously, the younger you are, the more time you have to plan for the future. But, don’t be fooled into thinking that being “young” means you don’t have to worry about your retirement or homeowner options. Most financial experts would advise you to begin contributing to a retirement account at the first chance you have, even if you only have a small amount. A small amount over 50 years is more than a modest amount over 10 years.

Emotional Decisions

Owning a home is an emotional investment as well as a financial one. This may lead people to opt for saving for a down payment instead of saving for their retirement. Typically, investing in a 401K or other retirement account will provide more gains than a real estate investment. But, having a home is a tangible, real thing, and one you can enjoy right now (as opposed to the big money you would hopefully have saved for retirement).

Although real estate may grow in value, the ultimate value of your home when you are ready to sell it equals what someone is willing to pay for it. You may think (or even be told by a real estate expert) that your home is worth $500,000, but if you can only find a seller willing to pay $350,000 then you have far less money than you thought. That same money in the stock market is easier to track on a monthly/quarterly/yearly basis and is also easier to access compared with the equity in your home.

How to Do Both

Is it possible to save for retirement and save for a down payment on a house? Sure, if you are disciplined and make some sacrifices when it comes to disposable income. If you still have money left over after making a healthy (and hopefully matched!) contribution to your retirement, it is wise to put that money aside toward a down payment on a house. The best of both worlds! But, if you have to pick one, then most experts would advise you to seek the long-term benefits of investing in a retirement account that, although it will fluctuate, should grow healthily over several decades and leave you quite comfortable in your retirement years.

It is impossible to predict the future. It is impossible to predict the curves that life will throw your way. But, it is important for your financial well-being that you prepare yourself in the best ways possible, which means setting up for your future and getting your priorities straight so that you can make the best decisions for your unique situation.