Connect with a top agent to find your dream home

Get started

Should You Save for Retirement or a House? Key Factors to Keep in Mind

At HomeLight, our vision is a world where every real estate transaction is simple, certain, and satisfying. Therefore, we promote strict editorial integrity in each of our posts.

You have your sights set on that dream home… but you also want to spend your golden years on the beach. Should you save for retirement or a house?

Unless you have an unlimited supply of cash, both of these dreams need money to become a reality. This requires saving money over a long period of time — even decades, when it comes to retirement.

We talked to a top-selling real estate agent to ensure we’re providing advice that will help you make the right choice for your lifestyle, all while living your dream.

A fork in the road between retirement or a house.
Source: (Oliver Roos / Unsplash)

New house or retirement? The fork in the road

If you find yourself at the fork in the road with the decision to save for a house or retirement, there isn’t a one-size-fits-all answer.

That’s because we are all in different stages of life with unique factors to juggle, such as:

Your age

In the US, the average age of retirement is 61. Even though most retirees expect to work until they are 66, studies find that most don’t stay at their jobs that long due to health issues or saving more money than expected, allowing for faster retirement.

On the other end of the spectrum, younger generations won’t see retirement for a couple of decades. This gives younger potential homeowners longer to save retirement money.

Your current retirement savings

Those nearing retirement have an average of $182,000 in savings for retirement.

On the other hand, people in their 20s have an average of $10,000 stashed away.

Furthermore, 50% of adults between the age of 18 and 34 don’t have a penny saved for retirement.

Consider where you stand with how much savings you currently have on hand for retirement. If you have no savings at all, you might want to wait to save for a house until you hit the benchmark that matches the national average for your age group.

Those benchmarks are as follows:

  • 20s: $10,500
  • 30s: $45,000
  • 40s: $63,000
  • 50s: $117,000
  • 60s: $172,000 to $182,000

The cost of tapping into your retirement fund

No matter what amount you have in your retirement fund, you don’t want to drain it to buy your dream home.

“I wouldn’t take all of it out,” advises Renee White, a top-selling real estate agent based in Walnut Creek, California. “If I needed $40,000, I think taking out $10,000 or $15,000 to get you over a hump is wise.”

She mentions that taking out the entire savings will be too difficult to put back in for most people, especially if it’s a large amount.

If you decide to use funds from your retirement savings, prepare to tack on extra time to your final work years. “You can work a year longer to maybe have a home for 30 years,” says White.

Exactly how much longer will you need to work? You should aim to save up approximately 70% of your yearly salary to live on so that you can retire by the time you are 67. The total amount of money you deduct from retirement savings will need to be factored into this percentage, which will tell you how much longer you have to work to replace those funds.

If you are worried about early withdrawal penalties from your IRA, there is good news for first-time homebuyers. You are able to withdraw $10,000 from your IRA to buy a first home without any penalty!

Factor in employer contribution

Next, how much is your employer contributing to your retirement? The average is at an all-time high of 4.7%. Try to contribute the maximum amount you can, but as White advises, any amount is better than zero.

For retirement, “I think I started at a 1% savings of my paycheck, which is better than nothing,” says White.

Evaluate your home loan options and your down payment

When you reach the point where you are ready to buy your home, you need cash to move forward. How much you need for the home purchase can greatly depend on the type of loan you get.

For example, an FHA loan only requires a 3.5% down payment. For a $200,000 home, you will need at least $7,000 in the bank to make your down payment.

Snagging a loan with a low interest rate can put you ahead of the game, especially when saving for a down payment. And remember: Waiting to save for the largest down payment possible isn’t necessarily the wisest move. “Homes continue to rise in price, so you can never play that catch-up game,” says White.

White gives the example that you can save 5% more for a down payment, but then the home will have appreciated more than 5% in value by the time you’re ready to buy. “The best thing is to get [a loan] with the down payment that you have,” advises White. She reiterates that even if you continue to save, real estate market growth will typically outpace your ability to accrue a full 20% down payment in most areas.

If you are on the lower end of the scale with $10,000 saved for retirement, you will have to make a personal choice as to whether you should tap into the savings so you can buy a house or leave it untouched.

Mortgage interest rates are always changing, and you often can get even lower rates with a 15-year mortgage term. However, with this option, your monthly payments will be higher because of the shortened loan repayment plan time.

Keep in mind that it’s a common misconception that FHA loans are only available to first-time homebuyers. And on the other hand, there are also zero-down-payment loan programs available, such as VA or USDA loans.

Property price in your desired area

Now that you know how much you do (or do not) have saved for retirement, employer contributions and loan types, the next step is to consider the price of a property in your desired area, whether you can afford to buy right now or not, as well as how home values are appreciating.

Property prices in your area will give you an idea of how much your mortgage will cost. Remember that it’s easier to qualify for a new mortgage when you are employed.

Buy the house you can afford

When you’re thinking about your retirement years, make sure you buy a house that you can afford now as well as during retirement.

Budgeting 101 

This calculator can help you determine your retirement budget. This includes wages and salary before retirement and after retirement, as well as itemized expenses, such as your mortgage, utilities, and taxes.

You can also determine whether you can afford your home by using the 28% rule. Some experts say that you should not spend more than 28% of your take-home income each month on housing, whether it’s from a salaried job or your pension.

Another wise move is to ensure that your total monthly living expenses, including your mortgage, don’t exceed 36% of your monthly income.

Your mortgage payment will depend on several factors, including your loan amount and interest rate. This calculator can help you determine the price of your new home and the estimated monthly payment.

Once you have your realistic monthly payment amount, don’t forget to build in some cushion in case of an emergency or job loss. White suggests that you save up at least three months’ worth of mortgage payments in case something were to happen. “Map out your budget and find out where your money is, and be really strict with it.”

White also suggests having money automatically put into separate accounts that you don’t look at. This will help build savings without being tempted to tap into the money unnecessarily.

From there, you will want to think about the appreciation value of your new home.

What to consider with home appreciation

Home appreciation is the increased value of a home over a time. Just like the retirement budget and monthly payment calculator, there is also a calculator to estimate a home’s appreciation value.

The national rate for home appreciation is between 2% and 3% per year.

When it comes to appreciation, location is one of the most important factors. Consider the neighborhood where you intend to buy, including aspects such as school districts. It also helps to have the home within convenient accessibility to shopping and green space. These sought-after elements can help bring extra appreciation to the property.

Also consider the speed of home price growth in your area. Note that in some markets, a slowing home price growth isn’t always a bad thing. The economy gets a boost from rising or stable home values due to trillions of dollars in equity. A slowdown in growth that still holds steady is healthy for the overall economy.

In terms of rent appreciation, the general rule is to expect the price of your monthly payment to increase each year along with inflation, which is around 3%.

However, there is no rent control for payment hikes in many cities. This means a landlord may increase your rent price at the end of your lease every year. Unless property taxes rise in your area, this won’t be a major issue when you own a home.

A computer to save for a house.
Source: (ian dooley / Unsplash)

When should you choose saving for a home over retirement?

We are all on unique paths in life with differing lifestyles and situations. While there is not always a black-and-white answer to whether you should save for a home or retirement, these guidelines can help:

  1. You already have funds in your retirement account. Ideally, the amount is near the benchmark for your age group, but White’s suggestion of saving 1% of your annual salary gives you a starting point if you have no savings at all, or don’t know where to begin. If you have zero funds, it’s best to start putting savings toward retirement.
  2. You have an employer contributing to your retirement fund — even better if it’s at the high end of 4.7%.
  3. You qualify for a zero-down-payment or low-down-payment loan. For example, VA home loans are available to those who currently serve or formerly served in the military. If you are approved for a VA loan, you must still meet your lender’s income and credit requirements.
  4. You want to invest your money wisely. With rent, “you’re throwing your money away,” says White.
  5. Your lifestyle aligns more with homeownership than renting. You might want multiple pets, need more interior space, want more land, and desire the ability to design and decorate your home as you choose.

“Your home is where you live,” says White. “Saving for a home is something you can take advantage of for the rest of your life.”

Header Image Source: (lovelyday12 / Shutterstock)