How to Decide Whether to Save for Retirement or a House

When it comes to your money, balancing different financial goals is hard. For example, trying to decide whether to save for retirement or a house can be frustrating.

So, should you put money into your retirement plan or save up for a down payment on a home? As the saying goes, personal finance is personal. What’s important is that you make the right decision for yourself.

Let’s take a look at trying to decide whether to prioritize retirement savings or becoming a homeowner — and how you might be able to do both.

Home purchase vs. retirement fund

When deciding whether to aggressively pursue homeownership or put money into the stock market for your golden years, there are some things to consider.

Long-term capital appreciation

Even though real estate has been appreciating at a rapid pace in recent years, the reality is that, in most places, homebuyers don’t usually see these huge returns.

For example, the average annualized rate of return for homes, as represented by the Case-Shiller Index, between 1928 and 2013 was 3.7%. For the same period, the stock market, as represented by the S&P 500, including dividend reinvestment, saw an annualized return of 9.5%.

Even on a yearly basis, consider that Case-Shiller Index saw an 18.8% annual gain in home prices as of November 2021. November 2020 to November 2021 returns for the S&P 500 — even without dividend reinvestment — amounted to 31.513%.

For millennials and other first-time homebuyers looking for capital appreciation, using compounding returns in the stock market might actually make more sense instead of prioritizing a savings account for a down payment on a home.

Lifestyle preferences and other financial goals

Additionally, as you decide whether to save for retirement or a house, you also want to consider your lifestyle preferences and other financial goals.

For many homebuyers, a primary residence isn’t actually an investment. You make monthly payments to a lender for your mortgage, rather than earn cash flow on an investment property. By the time you pay interest, property taxes, insurance, maintenance, repairs, and other costs, you could actually end up breaking even when you sell.

On the other hand, by setting money aside in a retirement plan, you have the potential to build up a portfolio faster, providing yourself with retirement income down the road.

If you think you might move, rather than stay in a home for a long period, buying might not make sense. In some cases, the financial advice is to think of your home as a lifestyle choice. Buying can be the smart move if you:

• Want to stay in the same area for a long period of time.
• Prefer a stable place for your children.
• Know that you want to make changes to your living quarters.
• Like the peace of mind that comes with not worrying if a landlord will force you out of the home at some point.

Don’t forget that you might have other financial goals as well, such as paying down student loans and setting aside money in an emergency fund. You need to figure out where those items fit into your planning before you end up saddled with a mortgage payment.

Related: How to Buy a House with Student Debt

What about the taxes?

Although you might be able to take advantage of a tax deduction for your mortgage interest, you must itemize it on your return. According to the Tax Foundation, only about 13.7% of taxpayers itemized in 2019. So, you might not be benefitting.

On the other hand, tax-advantaged retirement accounts like 401(k)s and IRAs are more likely to provide tax benefits, whether you take advantage of them now or later.

You might end up with a better income tax break by putting your money aside for retirement, instead of saving up for a down payment. Speak with a knowledgeable financial advisor to see if you can figure out a path that works best for you.

Related: The Great Debate: Physician Loan vs. Saving for a Down Payment

How to save for retirement and a house

In general, it’s usually a good idea to start saving for retirement as early as possible. However, that doesn’t mean that you need to put all your money in the stock market and be a renter.

If you want to make a home purchase in the near future, save up for your down payment while also funding your retirement plan.

Here are some financial planning ideas that might help you maximize your retirement plan while saving up for a down payment:

• Start with an employer match. If your employer offers a matching contribution to a retirement plan, max it out. You can start earning compounding returns now. Extra money can go into a high-yield savings account for a down payment.
• Consider a lower down payment. In today’s climate, saving up the 20% that some people consider a rule of thumb can be almost impossible for many would-be homeowners. Instead, consider saving up a smaller down payment, including looking into programs like FHA, USDA and VA. Later, you can put more toward your monthly payments to get rid of your debt faster — after you set some money aside for retirement.
• Use an IRA for retirement and home savings. A Roth IRA (or even a traditional IRA) can be a good savings tool for the future. After you max out your employer match, consider putting money in an IRA. First-time homebuyers can actually use money from an IRA in some cases without paying an early withdrawal penalty. This is a way to save for retirement, while also putting money toward a down payment.
• Use a physician loan. If you qualify, a physician mortgage can help you get a low interest and qualify for up to two times your income. Doing this early in your career can get you started with a home at potentially zero down. As your earnings increase, you can prioritize opening a brokerage account for retirement savings.

There are other ways to figure out how to work toward different financial goals at the same time. You might not have to choose whether to save for retirement or a house by talking to a Certified Financial Planner about your choices. They can work with you to create a plan that helps you make the most of your money now and in the future.