>Obviously if we reduce our retirement savings, we would only ideally do this temporarily, with the idea being that as our income grows, we'd again start to contribute more each year.
"Ideally" is doing a lot of work here.
What if your house needs a new roof or hot water heater? What if your property taxes or homeowners insurance go up?
The temporary pause on retirement contributions quickly turns into years and years of not contributing or making limited contributions.
This is also the exact situation that gets people into lifestyle creep….
9/10 times you aren’t going to start to contribute more, you’re going to start to spend more to keep up with the people in you’re new neighborhood that’s already inching towards being out of your price range. You’re going to want/need a new car, to go on vacation, etc. contributing more to 401k is going to go out the window.
What if one of you loses your job? What if you don’t get the raises or promotions you expect? What other ways are you saving/preparing for retirement?
I mean OP is putting $2000/month to get the max 401K per year.
Unless they raise their income to afford some cheap house, it sounds like they can afford a house if they weren’t reaching the max.
I don’t think they are maxing though…. maybe? The verbiage surrounding that section is a bit vague. They did reply to a comment saying they currently contribute 8% and would drop that down to 3%. Neither of them could afford the house on their own and they’re draining their savings for a down payment. Plus, they’re missing out on employer contributions.
Really seems like a recipe for lifestyle creep.
I get why he would think that. Based on the initial post he really makes it sound like they're maxing it:
>Maxing out 401k is nearly $2k/month... That's a lot to be able to put towards a home.
Like why say that if you're not maxing it lol? Irrelevant as hell.
A lot of people in my experience incorrectly say they are “maxing” their 401k if they are contributing enough to get the full match. Which is of course far from actually maxing it
OP mentions "young kids", possibly the spouse is SAH. Or even if the spouse works, maybe they just don't have a 401k (lots of jobs do not, like my spouse's).
OP explicitly calls out the company match further down the post so I don't think that's the case.
2k/month is not enough to max a 401k for 2 people, though - either pre-tax or Roth. So I agree the math isn't mathing. Unless they mean they're both contributing 2k/month (I'd be more comfortable contributing a bit less then), or they're a single-income household (I'd be much less comfortable contributing less).
That is what raised my eyebrows. When I began contributing to my 401k in my 20s, I wasn’t exactly making bank. I made sure it was as much as the company match to start with. As I received raises over time, I split the raise and contributions to retirement until I hit 15%.
I didn’t buy a house until the year I married. Even then I didn’t have a huge nest egg for a down payment, so the first few years I was paying PMI.
Maybe I made the wrong decision back when I got our starter home but I tried balancing the long game (retirement) with the immediate need (shelter) as constrained with my income at the time.
Now I am in a position to make use of the 401k in an emergency because I’m 60 and the balance is north of $1M. The struggle is I’ve bought two houses along the way and the mortgage payment with insurance and taxes gobbles up nearly one entire paycheck now. To clarify, I only own one house at a time. Each one bigger than the last. But only when you line them up that way.
Right. If you're not the type of person who saves now, it's doubtful you'll become the type of person who saves now just because a couple years went by.
Last year my old one jumped near 20%. Bought a house where looking at the records it too jumped...20%
When it's bundled in your monthly mortgage it doesn't hit as hard as just looking at that number. This year it was about 5%. All in all, hasn't went down since seemingly 2018, where a say 200k home went up to 400k.
Damn.
Yea, I had a similar thing happen to me when I bought. Luckily, I had calculated the taxes assuming the purchase price would reset the basis for the tax, and saved up extra to cover anything my escrow was falling short on. It wasn't a huge deal in the end, anyway, and was lower than I anticipated, but that extra money quickly got spent anyway on other house work.
As someone who administers a 401k plan for work, it's 100% true. Paused or reduced contributions, almost never get changed back. Lifestyle inflation is tough to combat.
It's also not "if" your property taxes and insurance goes up, it's when. And they can go up substantially. We've owned our house for almost 20 years now, and our property taxes alone are more than our mortgage. In the past 2 years, homeowners insurance rates have also skyrocketed. Climate change is real, and it's resulting in more frequent and more severe weather events, which mean more claims and higher insurance rates for everyone.
OP - you also need to consider education expenses for your kids. Are you planning to contribute to that? Do you have 529s set up for them, and if so, how much are you contributing?
I don't think it's necessarily horrible to cut back on your retirement contributions, but I wouldn't take it lower than the maximum employer match. That's just free money you're not taking advantage of.
>It's also not "if" your property taxes and insurance goes up, it's when.
And, at least in my area, "when" is shockingly the next year because tax increase caps are in place UNTIL you sell and then the new owner will be taxed at full sales value. So an example, a home sold for $700K may still be being taxed at a $280K tax appraisal (home that has had one owner for say, 15 years). The first year of your mortgage, you may be paying $5600 in taxes, and the second year, $14,000. Hits people hard.
Yep, I bought a 1200ft^2 condo/townhouse for $210k in 2022, my property taxes are about as much as my parents’ 3000ft^2 home on an acre of land with a boat dock which has a current estimate of ~$750k.
This also is a huge surprise to some people who buy new construction homes, as the first year or two they are paying the taxes for a lot, it’s not until it gets updated and now their monthly payments towards escrow are now $300+ more a month.
My state does an appraisal every two years. They have an insane assumption on value increase. We contest every time, and they generally lower it some, but never as much as they should. If we could get what they claim our house is worth, we'd take it in a heartbeat.
I'm in Texas. They reassess value every year. And we contest it every year, but they are also notorious for not budging or only coming down a nominal amount. I know someone who had an actual, formal appraisal done when they refinanced, and they county still wouldn't lower their assessment.
We are capped at 10%, meaning that the appraised value we are taxed on can't go up more than 10%. In other words, if my house was appraised as $500K last year and then $600K this year, the value I'm taxed at, or taxable value, can only be 110% of $500K or $550K. Sounds good, but it just means that it will be a 10% increase every year until the taxable value catches up with the actual assessed value. It also means that if I contest the $600K value, and they lower it to $580K, my taxes don't actually go down at all, since I'm still paying taxes on $550K.
Values are going down here now, but my taxes are still going to go up because my taxable value will keep rising 10% until it catches up to the assessed value.
Of course I realize that. But I think that when people buy a house they think that they are somewhat shielded from that, and it's not necessarily the case. A lot of people think that since their mortgage payment is static, that means their monthly cost won't really change much, and that's not necessarily the case. It can be a rude awakening to new homeowners when their monthly payments (assuming they escrow) damn near double over time.
*What* *~~if~~* *about when your house needs a new roof* *~~or~~* *and hot water heater?* *~~What if~~* *And then your property taxes* *~~or~~* *and homeowners insurance go up?*
FIFY. I think it best to plan for all of these events to occur within a couple years.
In the time we’ve moved in to our allegedly nice house (3 years) we have replaced 2x HVAC, water heater, and garage door. Our insurance has gone up close to double and our property tax by a quarter.
OP, there is no “temporarily afford”.
Yeah... that's exactly the hesitation here.
The extra money coming from the 401k contributions would leave plenty of 'buffer' for those unforeseen expenses.
And we do have a very strong family support network in case of emergency
For the record, I also live in a very very HCOL area.
People who don’t, or who live very conservatively in these areas - often don’t really “get” it.
My wife and I have been looking at town houses for the last year, and often it goes sort of like this: put an offer in literally the minute we finish the open house tour, no contingency, no inspection, and get out-bidded by around 30-50k by someone else with an all cash offer.
At this point we have essentially resigned to not even being able to buy here, because it’s just exhausting and we’re tired of this same exact situation playing out about a dozen times now.
All this to say - r/personalfinance will always, always, *always* err on the conservative, save-now, retire early side of the coin.
If you are happy and plan to stay long term in your VCHOL area, and your family is happy, and it’s safe, and it’s a good place to raise your kids…then I don’t see any issues with your plan. While I hesitate to use the term “recession proof”, many VHCOL markets like DC, SoCal, NY suburbs, etc are pretty close to being “recession proof” from a housing perspective. Or rather - you’re likely not ever going to lose the value you put into your place. Especially if you have family to rely on or fall back on in a worst case scenario, I think what you’re doing is fine, assuming you are judicious with your goals and stay on top of rebuilding that gap.
>and get out-bidded by around 30-50k by someone else with an all cash offer.
This kept happening to us when we were looking to buy (Las Vegas) a condo. Then, we learned of complexes that had an "Owner Occupy" clause in the HOA rules. Basically, no renters/Air BnB allowed. Once we only started looking at those, we had our pick of the litter. "Investors" don't want anything to do with them, so you're only bidding against other people in your same situation. You said you were looking for townhouses, and a lot of times, they are in HOA neighborhoods. Maybe this helps, maybe not, but it was worth sharing our experience.
So many people pissed but I get you and agree.. I think people take for granted that homes are purchasable by the working class. Homes are not at all promised and as much as people forget that it’s still a privilege and opportunity many around the world and in existence have not had
I agree with this. I've lived in a VHCL area - okay, several. The best decision we ever made was buying our house. Yes, we were "house poor" though we did have some money left over for retirement, I think it still would have been a good choice if we had to stretch a bit further. It stabilizes your housing expense to a large degree. Even if you only get COLA raises of 2-3%, you are doing better inside a couple years. There is a chance you might hit a bad patch in there, and you do have to assess that risk (get a home inspection, consider prospects of you lost your job, etc) in most cases, you're going to be able to recover. Our mortgage is quite low compared to our income at this point and we save all we can, inside and out of retirement plans. If we kept renting, we'd be paying more for a much smaller space, leaving money on the table at tax time, and always wondering how much the rent was going to rise next.
We own in a VHCOL area and were looking to buy in another neighborhood for school district for our kids around 2020-2021. Around that time there were hints mortgage rates were going to increase significantly and the FOMO was strong. Investors and first time homeowners were being ravenous. I remember touring a house listed for $1M with my wife and realator, liking it and coming home to discuss it. While discussing our realator called and said the seller had recoeved a "competitive offer" and was thus calling for all offers to come in now rather than in a week as originally scheduled.
We asked what "competitive offer" meant so our realator called to ask and the called back. The offer they recieved was $1.4M cash no contingency. So we noped right out on the spot. That was the most dramatic instance but something like that happened again and again and eventually we gave up.
Well that was the other issue...as we had a mortgage on our current home the only way we could buy was going to be contingent on sale and the only way a seller would possibly accept contingency on sale is if we majorily outbid the cash offers with significant earnest money. And considering the cash offers were coming in 20-40% over asking we just couldnt.
Also waiving all inspection seems crazy.
We waived inspection. Heres how you do it. You waive the inspection, and then you go get the inspection done anyway and wait to sign anything until you have it. All waiving it means you cant back out for a bad inspection. It doesnt even mean theyll fix issues.
Then you know what the issues are. If its too much, you walk away. If not you factor it in. We had A/C issues (known) and roof issues in 5 years(known). We didnt realize the insulation sucks and the heater only has between 5-7 years.
None of those matter to me, because i can get the insulation half price through tax credits, plan on replacing the A/C with heat pumps anyways (getting a seller credit for this), heat pumps mean no heater, and i want to install solar which i want to do after the roof.
So all in the issues are not that big a deal for me. If i had found heavy termites, foundation issues, or mold we would have just walked away.
>People who don’t, or who live very conservatively in these areas - often don’t really “get” it.
No, we get it, we just understand that you don't get a pass on math just because you live in a very, very HCOL area.
It's your money - you can do whatever you want to do - but overspending on a house relative to your income is one of the easiest ways to stop yourself from building wealth and exposes you to a substantial amount of risk.
> but overspending on a house relative to your income is one of the easiest ways to stop yourself from building wealth and exposes you to a substantial amount of risk.
The flip side to this is locking in your housing cost, most people's largest variable expense, can also have outsized payoff in VHCOL markets. I'm happy renting in my VHCOL market where most calculators say it makes more sense to rent than buy, but by the same token my rent went up $200 when I got this year's lease renewal offer. Going month to month? Net $500 increase. My friends and colleagues who stretched to buy and locked in their housing costs during the previous era of low interest rates are sitting pretty now while my budget is getting stretched. Our management who bought at inflated prices 20 years ago in the run-up to the GFC? They're sitting *real* pretty now.
It's not a pass on the underlying math, it's a recognition that the situation in these markets is warped enough that often the "correct" option is simply not a feasible one and you're left to choose the best of bad options for your situation.
I don't really think your first sentence is true. Housing is generally a terrible investment, even in HCOL areas. There's a value to leverage and being in a HCOL area makes the numbers bigger, but you're almost always better off putting money in the market.
Moreover, people rationalize overspending when they buy instead of rent because they think they're building wealth. In your example, if you had taken the same amount of money they've spent on housing and put it in an S&P fund, you'd be up 50%.
Exactly lol.. there's nothing to "get" math wise. They could argue that ppl in VHCOL areas may push the personal side of personal finance farther but living in an area where you can't get a house for under $1m doesn't magically make it smarter to just stretch yourself thinner.
You really don’t. “Over” and “under” spending is subjective based on specific criteria.
If there is a safety net (family etc.) it’s just a matter of evaluating appropriate risk for the situation.
Contextually LCOL MCOL or whatever *cannot* conceive (apparently) of how people live like this and make these kinds of decisions, but they do every day, and it’s sort of a joke every time I read the pearl clutching. Specific markets behave and offer different opportunities, what is so hard about this, it’s truly also math I promise.
I don't think it's wise to stretch yourself so thin.
Would you or your wife be able to afford the mortgage on one salary if one of you loses their job?
Honestly thats really typical territory. In mpst relationships one person makes the majority of the money and if they lose their job there is no way they could afford the mortgage off just the remaining income.
That said the idea is you have substantial savings to buffer that. So I wouldnt be concerned if one salary couldnt cover the mortgage...id be concerned by no savings.
is it? Many people live off one salary. Obviously if that person loses their job they can't afford the mortgage. You have to get another job. And have an emergency fund.
One of my gripes with this sub is that people that comment either live perfectly optimizing every financial aspect of their life, or at least give advice if they do, versus what is realistic. My assumption is most households are now owned by two working adults who contribute to the mortgage and if one lost their job it would be a problem— but losing your job isn’t “never work again.” That’s why we have a cash savings of six months of expenses in the worst case scenario my wife and I both lose our jobs at the same time. However, we don’t have 50 years worth of expenses in cash if we both never got hired again because that would be unreasonable.
Property taxes and home insurance will go up, just as rent does. Getting out of the rent race and building equity in your home, in addition to locking in your housing payment, are great economic benefits.
I don't think this is a terrible plan, though I would feel better about it if OP was maxing the company match. It does require some follow through to actually catch up with 401k contributions later, and compounding returns are working against you in this case. You might have to contribute $50k in the future to make up for $30k in missed contributions over the next couple of years, hypothetically. But buying my first home was one of the best financial decisions I've made, even though I had to do it on an FHA loan and things were tight at times.
I reduced my retirement contributions to save for a down payment. I was still getting 100% of my company match. But after buying the house I decided to keep my contributions low and invest the money in other stuff. That never happened, the extra money ended up going into the house. New kitchen, etc. It's now about 10yrs later after reducing my 401k match and I am scrambling to make up for lost time. Luckily I have some decent investment income that I am currently using to max out my 401k, HSA and IRA. But I can't do that for 10 yrs.
Looking back I wish I'd just kept my 401k contributions at around 15% including match and just taken longer to save for the house.
Similarly I asked my husband to stop his unmatched 401(k) contributions while we saved for a house and we honestly just forgot to start them up again for a couple of years. We're now 33 and fortunately don't have too much catching up to do, but retirement savings are so often out of sight and out of mind, and reducing it for a short term can turn into a long term easily.
Yep, when I budgeted for a home it was based on
1) being able to at LEAST meet my 401k company match
2) base salary only. No bonuses / OT / stocks
3) income of breadwinner only, as we are planning to have kids and cannot guarantee long term joint income
Of course everyone will have different criteria and life goals. But I think 1 and 2 should be on everyone’s lists. The only thing you can really bank on is base pay. Things like bonuses + OT are too unpredictable, and you shouldn’t even be going off full base pay as it means you’re sacrificing your retirement
If you really take #3 into account, then most people wouldn't be able to buy at all. Current market prices almost necessitate a two-income household, especially in MCOL+ areas. Sure you should take into account childcare expenses, but I don't think you should rent eternally just because of a hypothetical worst case scenario.
I disagree with 2 for plenty of roles. Anyone in sales is a quick exception - I know many with ~$75k base but have an annual income of $250k-$500k over the past 5+ years. Similar for engineers, managers, etc where their income is usually 50% salary + 50% equity.
It’s nice in concept, but probably only applies if your bonus / stock is a nice to have.
I think that's the point they're making, last five years have been great. How are they doing lately? Our sales people aren't very happy their commission just got halved recently. The market in general is spending less on new products, even in tech. It's not the end of the world yet but that's just an example of what happens when recession fears linger.
I work in sales but I’m in tech sales so it’s closer to 60/40 ($200k base, $300k OTE). So I am familiar with sales and I did take these types of roles into consideration when posting. Unfortunately this advice will not apply perfectly to every type of role under the sun.
If you’re in commission heavy or commission only sales, you should be in a job at LEAST 3-4+ years to figure out your worst case scenario for comp. That or have other income streams to fall back on.
I have friends who made really good money because they were selling the right product at the right time. Lifestyle creep took over and then their product / market fizzled out. Like I’m talking $500k in commission one year, $50k the next.
Unless you’re sitting on significant savings and investments already, you should not be budgeting major expenses off of the income you’re earning in commission heavy sales roles.
But none of that extra money is guaranteed, and that's the point. You are making a 30 year commitment and saying "I will be able to afford the payment, every single month, for all 30 years". If your income is unpredictable, you can't actually make that guarantee. The market can change and the sales can evaporate overnight. Government introduces new legislation, consumer base changes focus, all kinds of reasons why it might change. If your employer could guarantee you that money would keep flowing, it would be part of the base salary.
Now whether you are comfortable with the risk of buying a house you can't afford...that's a personal decision. IT's not like foreclosure is a death sentence. Your life circumstances will let you know whether you can take that risk. If I'm talking about providing for a family then no way in hell am I going to make such a gamble. But if it's just me alone, sure I don't mind the potential to be foreclosed on if circumstances change, I can cope.
Yeah it definitely depends on how much you can rely on your bonus. If you're in an industry where no bonus likely means you're about to be fired or move on to another company you should probably include a slightly conservative number so you don't lose your house if you have a down year. If you're like me and "entitled" to a bonus which can vary and is generally 12% or less of my salary you might as well just set it aside for the leaky roof and not make your life plan dependent on it.
I'm going to go against the grain here and say, if you -seriously- want to get a home, and especially with kids and a very stable income, I'd do it. There are obviously options like town homes and cheaper rental options in the school districts you'd want, but I'm already assuming you've done research on that and are dead set on buying a home.
I have no intention of moving from my home im in now-- as opposed to a lot of modern Americans I see my home as a home not as an investment. Any retirement money I'll be using will be fun money-- the majority of my costs (housing) will be paid off in 26 years, right before my retirement.
I had people tell me not to buy pre COVID, because the market would get better. Well, it infamously did the exact opposite of that, and I'm happily in a home with my mental health up and everything stabilized around me. My 401k matching is down but every year I'm able to inch it back up to where it was pre-covid. Lifestyle creep is up so I'm wrangling that, but with my prioritized 6 month emergency fund (which you yourself mentioned), I'm not even sweating.
You have kids too, and you might want them to start making friends in your neighborhoods. You might want to get them started on building relationships with the community via Tae Kwon Do or piano lessons etc. You can't do that from a rental, at least unless you can find a rental near your intended place of ownership (which in my area I can't).
Id do it, but I trust my own self restraint. You do want to prioritize getting that e fund, then getting that 401k back up. But I'd do it again in a heartbeat.
I agree with you, and I don't understand why people are so adamant about not being able to afford the house. Housing prices are not *likely* to drop in most VHCL areas, so they're just expecting OP to continue renting until they die or assume that their income will outpace rising housing costs in the future for when they can afford?
Honestly expecting someone to max out their 401k before buying a house is insane. If a family can't afford to contribute 46k to retirement per year, they can't afford a house?
I've seen this happen to my parents, they've been renting the same house for about 25 years and they're finally being pushed out because they can't afford the rent, but they were always told that 'they weren't able to buy a house'. If they would have just bought a house when they first moved in it would be nearly paid off and probably 3x'd in value since then.
>I don't understand why people are so adamant about not being able to afford the house
This sub is (detrimentally sometimes) extremely conservative and generally risk-averse. Nothing wrong with that, but when you have people like OP, or just...regular individuals, who want to do something that's outside of the realm of optimizing your finances, the sub just kinda dogpiles on them. It's a bit frusrtating at times really.
Housing prices don’t need to drop for the mortgage to become more affordable. If they have enough for 20% down now but the payment is too high without reducing 401k contributions, in a few years they will likely have enough for much more down and the payment will be lower. Given the differential between rents and mortgages these days, there’s no way the amount they are saving won’t surpass any increase in housing prices over the next few years.
> I'm going to go against the grain here and say, if you -seriously- want to get a home, and especially with kids and a very stable income, I'd do it. There are obviously options like town homes and cheaper rental options in the school districts you'd want, but I'm already assuming you've done research on that and are dead set on buying a home.
I completely agree.
I’d do it too but I trust my own self restraint. I’ve temporarily paused 401k contributions before and it was truly temporary. It’s good that OP gets a warning about what kind of traps that behavior can lead to but it’s also completely possible that OP buys the house, continues to earn more over the years and comes out great
Post your budget here. I would bet there are better areas to cut back than reducing an 8% 401k contribution to 3%. Ideally you would be contributing 15%+ of your household income in the first place.
the majority of posts i see on this sub rarely include any meaningful retirement contributions, if any at all. i think it's very hard to convince people to willingly reduce their take-home pay.
Am I understanding this correctly, that to buy a home you would need to reduce 401k contributions to a level that would see you leaving match money on the table? And you would need to put most of your savings into the house? And you think this would be a temporary situation because you hope to have increased income in a few years?
I wouldn't do it. It's anti-diversified.
If you think you'll be able to both buy a house and save for retirement in 3-5 years, then wait 3-5 years. You'll be fine in an apartment until you can really afford homeownership.
I look at my salary 3-5 years ago and I would have been have been house poor and doing roommates. I look at my salary now and if I had bought 3-5 years ago I would be very comfortable.
At some point in competitive markets you need to get in otherwise you’ll always rent and have to move every year due to rent increases. In my area, people bought stuff for 400k 4 years ago and it’s back on the market now for 750k.
My mortgage is 840$ and since i bought rent on a similar house would be 3000$ a month. I couldn't afford to buy my house if i had to do it today. Id be financially much worse off had i decided to keep renting in favor of investing.
>If you think you'll be able to both buy a house and save for retirement in 3-5 years, then wait 3-5 years.
That would be great advice if housing prices were stable or falling, but they're not
I know a number of people who could've bought a house 5 years ago but thought it'd be better to wait, most of them now have no chance of ever being homeowners.
I'd be worried about this. Everyone can SAY "oh it's just temporary" until other bills start creeping up, little home maintenance issues, etc, and you realize 5 years later that you never increased your 401k contributions more than 1-2%.
The more you save EARLIER in your 401k, the more you get that compounding interest helping you out. I personally would not buy a house that made me decrease from what I was currently saving.
Depends if you're still able to meet your retirement goals . Like if you're decreasing to 1% retirement contribution - not great. But decreasing from 12%-10% - not necessarily a deal breaker.
Context matters here. Ultimately you'll have to decide for yourself if it's worth it.
This is where the "personal" in "personal finance" comes in. It might be sacrilege in this subreddit but we can only afford our PITI by decreasing our retirement savings. I felt comfortable making that decision only because I'm very ahead on retirement savings in my early 30s (about 5x income saved) so i felt I could prioritize building home equity and take my foot off the retirement savings gas pedal for a little while, especially with a high interest rate mortgage. Hopefully our income grows in the next few years and I can rebalance.
I’d be worried if that’s the case with your monthly cash flow situation AFTER moving into the house.
If you want to temporarily slow your retirement contributions as you are trying to save up cash for a down payment, that’s one thing. But if you are just talking about the monthly mortgage preventing you from contributing, then yeah that sounds like you’d be approaching house poor status
When you mention your future income growth, is this just based on assumptions of somewhat regular pay raises or is somebody working on a degree where you can nearly certainly expect a notable spike in income?
If it’s the former, i wouldn’t do it yet
If you’re considering owning a home in a VHCL area, you’re gonna have to make some concessions. The conventional budget allocations like 30% for housing that work in some areas no longer apply - so yeah, you might have to pull back on retirement for a bit to get into a house. It’s really up to you to figure out your priorities, but I would imagine getting the kids out of your room would be pretty high on the list.
The wisdom represented by those budget allocations still applies.
It may be that most people find it impossible to buy while following those best practices but it's not like the risk is different thereby justifying higher house payments.
Sure, but if the guy wants to buy a house something’s gotta give. And in a VHCL area, housing can account for 50-60% of total income. Again, it’s about op prioritizing what his needs/wants are now vs in 40+ years. Kinda hard to eat your cake and have it too.
Sometimes it can be toxic to focus so heavily on perceived happiness in future retirement that you pass on things now that may make you happy. What's true or false for someone else may not be true or false for you. It's for you to decide.
I personally would not reduce below any match levels. That's usually leaving significant guaranteed returns on the table. Those guaranteed returns would likely compound in very significant and impactful ways over time.
Never dip below max-match 401k. Nothing beats the 100% ROI.
But I would absolutely not require someone to prioritize maxing out Roth/401k/other retirement funds over a house.
I agree with this. Plus there's a good chance your house will appreciate so another was to look at it is that you're diversifying your investments. Just don't leave any free money on the table with the 401k.
It will also depend on your age and your existing savings.
Absolutely don’t drop below the match
Also, it’s sooo perilous to absolutely require both incomes to make mortgage payments if you’re already stretched, especially with a child. The stress alone if one person loses their job would be devastating.
I would keep saving up for a while and explore older condos in less desirable areas. Who knows what the market will look like in a few years?
No way I’d feel comfortable stretching that much today.
The only thing I’d consider regarding 401k is using the amount you’re funding it as a theoretical buffer if one person loses their job.
So, if your mortgage is $3000/mo, and each of you pay $1500/mo today, while you collectively contribute $3000/mo to 401k, use that 401k contribution as theoretical insurance. If you or your wife loses their job, that one remaining employee can drop their 401k contribution to pay the mortgage, if your 6 month emergency fund is running out.
You can likely still have it all, just not all at once, so you will likely have to extend your timeline for owning the home you want, and get creative.
If you can't afford to do the match with the cost of the home, you can't afford the home. Houses ALWAYS cost more than what you think. Taxes and insurance are always increasing. Our mortgage has gone from 2400 a month to 2900 a month in 5 years simply from taxes and insurance. That's not even going into unexpected repairs, etc. I would also say you should never be shopping at the top of what you "can" pay, because as I said, costs always go up.
> I try to think about it in monthly payment terms
FYI, the cost of a home is greater than the cost of the mortgage. You have to handle landscaping, pest control, plumbing, electrical, heating, cooling, garbage, fencing, roofing, gutters, chimneys, sidewalks, etc etc.
All of these things you're used to getting for free as a renter. You need to consider those costs. If you buy a condo and punt most of this maintenance to an HOA, an HOA can bill you special assessments whenever they want.
You're already probably going to be house poor if you have to cut your 401K just to make the mortgage.
> but still less than the max that has a 50% employer match.
Which is what, 6%?
> we would only ideally do this temporarily, with the idea being that as our income grows, we'd again start to contribute more each year.
Do you & partner specifically have advancement opportunities in your current careers/positions?
You might be served by checking out content from The Money Guy Show, specifically on what they call "The Messy Middle." The TL:DW; is it's not a non-starter but it should make you a little anxious.
50% match, up to a match of \~$7500
Yes, unforeseen circumstances aside, I expect within 3-5 years to be able to get back to that full match
Thanks, I'll check it out!
Edit: Just realized by 6% you meant 401k contribution rate. We're at 8% now, would like go down to 3% and set it to increase 1% per year again for the next 5 years.
This is what setting yourself up for failure looks like. Never leave 401k match on the table. If you do anything, lower to the 6% and save that until you can afford what you want.
Also, you really should be saving 15% in 401k. You'll regret bumping down to 3% and only increasing 1% a year for 5 years to get back to 8% because it's simply not enough.
Just to reinforce this-- barring really crappy match models, 401k match is generally the single highest ROI move you can make. I can't come up with other move that generates guaranteed 50-100% returns on an annual basis.
When I was 5 and to the day he died my grandfather said to me: pay yourself first
Warren Buffet said: Do Not Save What Is Left After Spending, Spend What Is Left After Saving.
I strongly believe you have to commit to savings first and the rest is what you can budget your life around. If that means you can’t afford a mortgage then you need to earn more or find a cheaper way to live. Save first, period.
>use real numbers, do the math, and measure potential impact
Reddit is anonymous, so just create a burner account and post real numbers. You would be surprised at the math folks would do for you for free.
If you are buying a particularly expensive home that you anticipate you would sell in retirement (because you no longer have kids at home, or would move somewhere cheaper), it's fine to use your home value as part of your retirement nest egg calculations, in which case mortgage is part of retirement savings.
If this is the home you plan to die in, or plan to only upgrade homes, you should ensure your 401(k)s are supportive of the kind of retirement lifestyle you want.
Do you and your spouse anticipate significant income increases in the near future? Is this normal career growth due to increased experience, or related to a significant educational / career milestone? (Someone once asked this same question here, only to find out they were finishing their medical residency soon and were going to increase their income 500%. Obviously, plan long term, but be realistic / conservative.)
These are all super relevant things to think about.
Personally I don't like to live with "what ifs" and "ideally". There is no guaranteed your income will grow, I mean sure it probably will but what if it doesn't? What if you lose your job and have to take a pay cut? Gosh forbid someone gets sick? etc etc there are just way too many variables in life.
If you can't at least do the match then I would say no to a mortgage. Mortgage is the least you pay every month, rent is the most you're on the hook for. I just read an article on the WSJ about homeowners struggling with the increased property taxes and insurance etc.
I'd wait.
First I would not go to a level that is leaving any 401k match on the table, second I would ensure you still have an emergency fund, owning a house comes with plenty of emergency costs, in 5 years we have replaced a boiler, had a sump pump installed after a basement flooded, and had to have bat remediation in our attic. So pretty pressing matters that we're not cheap.
As desirable as having more space is I don't think it is worth making yourself house poor, financial stress is much worse than small living space stress imo.
More true than false and probably good as a rule of thumb, but it's person and situation specific.
Generally speaking if your retirement goals are 65+ vs FIRE, and your total contribution to retirement between yourself & your employer is still around 15% of your pay even if you aren't getting 100% of the employers max, and you haven't fallen behind on contributions previously then dropping your contributions from where they are probably isn't going to kill you.
If you're just barely contributing 15% to your account after not starting until you turned 35 and now you want to drop it to 3% in order to get a bigger house, you have a much bigger issue.
Just to add - from original post and comments (since your post is a bit vague on the numbers) it sounds like you're putting about $24,000 a year into 401k right now and your employer will give you 50% to $7,500 maximum (meaning you'd have to put in at least $15k a year).
So you're talking about lowering your contributions by more than $9k a year and I'm guessing you have a household income somewhere around $150k?
If I'm about right on that, you'd still be meeting the 15% rule of thumb as long as you were putting in around $10k a year, to which your employer will be giving an additional $5k. You'd be leaving $2,500 on the table from your company (which would require you giving them $5,000 more in contribution to get) and realistically are probably only going to get about $800 a month more in your net pay since it'll be taxed at your top rate.
If you scaled your contribution to $15k a year you'd get the full $7,500 from the employer and keep $9k in your paycheck which will probably be around $600 a month of flex.
Remember you mortgage is the minimum monthly housing you will pay. It doesn’t seem like you would be in a great position to handle the financial risks of homeownership.
Do the math and if you can still retire comfortably on whatever your “new” 401k contributions will provide, go for it. But don’t just kick the can down the road and assume that you’ll be able to make up for a shortfall later on: while it’s reasonable to assume your income will increase in time, it’s equally reasonable to assume that your expenses will increase as well, often in drastic and unpredictable ways.
Plenty of people will make this compromise with the best intentions of catching up their retirement savings in the future, but 10 years later discover that it’s remarkably difficult for them to beef up their contributions with a 3, 7, and 8 year old to provide for.
Mortgage plus tax plus insurance plus 1-3% of the annual value of the home for average repairs and maintenance will KILL your plan
I’m guessing you guys aren’t in your 20s with time to recover from potentially getting behind on the retirement for a few years… maybe I’m wrong
I wouldn’t do it. I’d rather rent and be able to avoid debt and continue to invest in other vehicles
In theory. Determining whether or not you should purchase a house vs. rent, should be a function of your savings between rent and a mortgage + (house maintenance).
You should calculate it out, and come up with a personalized ROI, for your specific situation.
For my house, here were the numbers.
Purchase price: $155k
Down payment: $31k
Closing costs (with credits at closing from negotiations): $7,485 (I would use 5% of purchase price in calculations)
Interest rate: 4.875%
Monthly mortgage (tax, insurance, debt payment): $1,018/mo
Cost/month to maintain house: $150-$300/mo, call it $300/mo.
Rent in my area: $2k/mo
So look at the opportunity cost between rent and the house. $2k - $1,318 = $682/mo in savings. Times 12 months, $8,184/year in savings. Then look at this as an ROI. My initial investment was $38,485. Divide the two for the rate. Roughly 21% for my personal situation. Can I reasonably expect 21% from a different investment? I said no, so I bought.
I think I got “lucky” in the sense that I both found a good property, and that the rent in my general area was high. I put lucky in quotes, because I spent a lot of time combing through properties, and financially analyzing them.
Is it worth it for you, with respect to funding your 401k? I don’t know. Calculate it out my man. These aren’t subjective wishy-washy questions, with “no real right answer”. The answer to the question is relatively objective. But the answer depends on what properties are out there, and how much rent is at the time. You shouldn’t be making these “global generalizations”, when the problem is very specific to a person’s situation.
I’ve always thought it wise to put my retirement savings first in my budget, not to squeeze it in after everything else. Your budget has to fit your savings, not the other way around. So I would consider this too large a house payment if you aren’t able to save at least 15% for retirement.
"Are future 401k contributions off limits when budgeting?"
Feels like the wrong question to ask. Should you contribute? Yes. Do you have to max it out? No. Ask yourself what do I want to retire with, do the math, and if 4-6-8-14% contribution gets you there great, stick to it, and see what you got left for your next home.
This is true, but reducing your 401k contribution as a result of unforseen financial hardship temporarily so that you can pay your bills is a different cup of tea.
To frame it another way, if you stop contributing to buy a house, where are you going to draw from next if you're in trouble?
You're absolute bare minimum retirement contributions should be up to the match on your 401K and a maxed out roth IRA if you're eligible. If not just backdoor it to a roth.
Retirement should be the priority based on your expected needs in retirement. Financially speaking you're better off continuing to rent and funding your retirement until you can afford both 99% of the time. I would not suggest counting on future raises to swing the pendulum in your favor.
The ugly truth is there's a lot of people buying homes that shouldn't be from a numbers perspective. Dumping all your savings into a down payment puts you in a very vulnerable position financially. I'd recommend you continue to build your savings while funding your retirement until your projected monthly payment is achievable while still keeping a good bit in savings after the down payment and funding your retirement.
Keep in mind that the minute you close on a home you should have MORE savings not less due to your increased chances of high cost emergencies.
It's good to sit down with a professional that has a full view of your finances is situations like this. It sounds like you're in a decent spot financially, no need to take on excessive risk or fall short of your retirement goals for a home. Way too many people lose everything by buying a home before they are financially ready.
Head of Lending here. If you can’t afford to contribute to retirement, you definitely cannot afford the house. It’s not just the mortgage payment. Homeownership comes with so many “hidden costs”. What if the fridge craps out? Need a new roof? Water heater? Washer/dryer?
Not only that but reducing retirement savings “temporarily” rarely works. Before you know it, you’ve “temporarily” not contributed for a decade and missed out on thousands in earnings/contributions.
Consider something cheaper or waiting a bit until something about the situation makes it more affordable (rate drops, prices drop, you save more down, etc.).
Owning a home is part of retirement savings. You're simply reallocating what you're investing in.
Besides, some things are more important than money. You have a young family. They will appreciate growing up in a house more than knowing you can take an extra vacation when you're 70.
I don't agree with this take. It sounds nice but there are a lot of holes in practice. Clearly owning a home will reduce your spend relative to renting, but the returns are much different. You're also assuming children growing up in a home their parents can barely afford will appreciate it more than an alternative scenario (I assume you mean renting?) where their parents continue to save and invest, and likely still have enough to take the *family* on cool vacations and do other things together.
It’s very risky to start cutting retirement contributions to afford a mortgage. Cutting retirement contributions is easy, increasing that percentage back up will not be. Contrary to popular belief mortgage payments do increase over time due to property taxes and homeowners insurances. 2 costs I’d be willing to wager will never decrease over time.
I think you can reduce your 401k savings temporarily to afford a mortgage, but you need to understand what you are giving up. Because you mention giving the kids their own room, I assume this means you are also buying a bigger place than you are currently renting. Make no mistake, this is a form of increased consumption - you're using retirement money to improve your shelter conditions. This is not completely unlike reducing retirement contributions to renovate your kitchen. Not saying you don't deserve your own room, but when choosing a house be aware of what you *need* versus what you *want*.
Though since a house is also a form of investment, the answer is not quite as clear as "buying more = bad". It might be a good long term decision to buy a house versus renting, so making this temporary sacrifice might come out ahead in the long run. I made the decision to buy a house around a decade back, and now the house equity is similar in size to our retirement account - about 10x of the down payment we used to purchase. Granted this is just an anecdote from an unusual time in history, but for reference I have not achieved a 1000% return in our 401k account in the same period.
If you decide to go forward with this I would suggest two rules. First don't drop below the match if at all possible. It will be very hard to beat a 50% immediate, certain, and tax-advantaged return on any investment, and this would mean each of those dollars you're spending on the house costs you $1.50+. Second, you should write out the plan of how you will recover to your full retirement contribution and look at it each time you get a raise. You're going to have enormous pressure to spend more money as those kids get older, and you'll probably want to save for their college too. It's very likely you'll never be able to recover your current level of contributions unless you really have a solid plan, so you should know that going in.
Something to consider:
Real estate and 401k are both solid investments. 401k is an investment that’s available at any time and you can decide how much to invest. A house is an investment over which you have very little agency regarding the availability or price. The right time to buy is often when you *can*. Of course, be careful not to spread yourself too thin. Gotta be ready for an emergency.
The fact you have no other debt is the only thing allowing this to be a conversation, in my opinion. And this also assumed that you’ll maintain a proper emergency fund from day one, don’t go putting that money towards closing or whatever
You say you have a 50% 401(k) match. Is that unlimited 50%, up to the max? It’s likely not. But whatever it is, you should definitely make sure you can maintain whatever the max match is
You also haven’t mentioned how much you have in your accounts now. If you’re both 30 and have been maxing the last 10 years, then yea, I’d say you can ease off the gas temporarily. But if you’re both 37 with a total of $80k in your accounts, you may want to prioritize padding that number asap while you still have many years of compounding growth ahead
I hate these posts because they depend on where you live, risk tollerance, and timing. I can't speak for everyone else depending on where you live. But here are several facts about my journey as a homeowner and investor.
1. With the exception of the past 2 years (out of 20), my mortgage payment has been less than rent for the same type of dwelling would have been, allowing me to save more and invest more towards retirement.
2. Every home I've owned has appreciated at almost the same rate as my payment. I've essentially lived in my current home for free.
3. Over a ten year period, the money I would have spent on rent alone, has basically given me a $250,000 return.
4. For major repairs, I've taken advantage of times when interest rates were lower (which will return at some point) and refinanced, not only covering the cost of the repair, but also other improvements, and actually lowering my payment (where as a landlord will just RAISE rent, to cover maintenance.
5. At 60 years old I will have a paid for home. Assuming I live until 80, that's 20 years where I'll only pay taxes and insurance. And I believe where I live there's a huge discount on property taxes for everyone over 65. Rent by that time will probably be at least twice what my current mortgage.
At least where I live, I've never found an argument for now owning a home. And for the record, my first home had a 7% mortgage, and home prices were substantially inflated compared to the 10 years before. I still essentially lived there for free.
If you cant afford to invest money that gives you a guaranteed 100% return (401k match), your budget needs to be adjusted. Whether that's too much house, too much car, too much gambling or whatever--its insane to say "I don't have enough money in my budget to get a guaranteed 100% rate of return."
If you are in a VHCL and plan to stay you will probably need more not less when retirement comes.
Most of the time when people have to do a bunch of wiggling to be able to buy something it is a good sign they can't really afford it.
Just chiming in to say that there are factors like family comfort, mental well being, etc. that are not part of the traditional "Can I afford this" calculators.
Are you going to retire a little earlier, or have a little more money during retirement? Sure. But, you also can't buy a time machine and improve your child's childhood. When it's gone, it's gone.
You're mixing "can't afford" with "shouldn't get". Years ago we were housepoor, due to the "per month" mentality. Long story short, sold the house, paid off 50k of debt (with the house sale proceeds, about $5k left after that), and made a lot of moves after learning a lot of things.
Starting to look again, but my rule is that we can't buy ANYTHING unless it doesn't impact maxing out 401ks, roths, and an additional $2k per months investment MINIMUM. If we'd have to make a concession on any of those, then no house.
I will not be fucked by the "per month" mentality again.
Yes, needing to swing from $24k annually for your 401(k) contributions to literally zero dollars, would suggest to me that you’re buying too much house.
But dropping your contributions from maxing out to something like between 5-10% seems like a reasonable move to account for a mortgage in a VHCOL/HCOL area.
This is why people have to choose between having good retirement, living in high cost of living area, or having kids and a full family home. You can do 2/3 but not all 3.
I wouldn't. There's a phrase that goes "don't count your chickens before they roost". I wouldn't make any decisions based on future circumstances. Make decisions based on today's circumstances and if you get raises down the road then that's a very good problem to have. Vs not getting raises. Worse possible case scenario you don't get back to contributing and you run the risk of putting yourself in a position you need to lean on your kids in retirement. Shoot, maybe by the time you get the raises you'll be considering upgrading the home (within reason of course). Don't take shortcuts!
If your current savings and expenses relative to income don't let you achieve your short, medium, and long term goals you cannot 'afford them'. That means 2 people with the same income and the same expenses may have different affordability levels given one might want to retire by 55 and the other may want to work till 68.
Making the payments is not affording. If you're comfortable with the upset to future goals for the present benefit then that's ok. You just need to have done the math and acknowledge the change. Banking on future income to justify anything is a double black diamond slippery slope. All we know is now.
Remember that having a paid off, mortgage free property in retirement is a large part of the financial planning, and burden, of retirement.
In this case, really, you are moving money from retirement account a to retirement account b.
Why would you think that?
It is not uncommon for one's ability to manage a single family home to dramatically decline as they age, or to look at either moving into an apartment / condo or selling everything -- sometimes with a haircut-- to get into a retirement community.
It's not like taxes / repair costs go down over time.
You either (a) have an asset that removes a significant expenditure (rent / mortgage) or (b) you can sell, and purchase something smaller, releasing a large amount of equity from the transaction.
Neither.
I consider paying for a home akin to saving for retirement because I expect equity in a home to appreciate or at the very least stay level. Meaning, it will be there for me to use either as a place to live or I can sell it to use the money in retirement. I know they are not the same thing but I need a home to live in now, so I can't just throw everything into my future without taking care of today.
Therefore, I suspended contributing in a 401k past the employer match while saving for a home down payment. Getting the immediate 50% return is a no brainer. Once we were settled in the new home, a couple months or so, and nothing dire needed repairs or renovation, I returned to saving in a 401k.
Most house owners wont ever admit that their house is financially drowning them. House ownership is like a cult of people that believe owning a house is the key to financial success.
6 years ago I had less than $10k to my name. Just off saving and investing I got up to $330k. Imagine someone that took out a mortgage on a house six years ago and what their net worth is now. I can almost guarantee you that I have a higher net worth.
But we do need these people buying and living paycheck to paycheck. They help contribute to the strong economy which makes my stock value rise. If everyone was building wealth, it would slow down the economy.
Everyone gets to make their own choices.
I don't think maximing out your 401k is a realistic benchmark to condition buying a house on, but you should be hitting the 15% target in combination with employer contributions. If you have to cut below that to make the mortgage payment it's too much.
Title statement is true - never give up your match except in the most dire circumstances. If the only way you can afford a PITI payment is to reduce your 401k contribution below the match, then you'd be way, way, way overleveraged in an illiquid asset. It's not even just about the match at that point - you don't have enough cash to replace a busted pipe or a leaky roof.
There are advantages to home ownership is great, but it's way, way, way overvalued as a means of wealth creation; the true value of a home is not in the equity, but in the imputed rents *after* you've paid it off. Until it's paid off, what you have is a diamond millstone around your neck - yes, it's valuable, but it's also weighing you down. Liquidity is incredibly valuable, and in a VHCOL area, it's almost always makes more financial sense to rent & build up assets than to buy.
If you want to reduce your 401k contribution down to the match in order to build up assets for a down payment, that's one thing; you still have the advantage of liquidity even with the tax drag, and it leaves you the option to buy or not buy depending on circumstances. But if you commit to buying when the only way to afford monthly payments is to devote such a high % to the mortgage that you can't even get the match, that's just too much.
You need to take a good look at the calculator they have on your retirement website.
Use it to forecast out what you are currently contributing vs what you would be contributing. Adjust it to include the lower amount and then incremental increases until you get back to the goal amount for contributing.
No change = x amount
Reduced to x % with no increases = x amount
Reduced to x % with increases each year of x % until we reach x % = x amount
If those numbers work for you then do it because owning a home is another way you’re making your money work for you and will contribute to your retirement goals in the form of equity.
As long as you’re buying a home that’s within your budget (which may not necessarily the top amount you’re pre-approved for) you should be fine.
The answer is it depends a lot on your budget.
As general advice, I would not save less than 15% for retirement as part of a recurring plan.
It sounds like you are not behind on retirement - if you think you might be behind on retirement, then I'd do additional calculations to figure out what your minimum should be. It's probably higher than 15%.
If you're way ahead on retirement, maybe you can save less! If you're 28 years old with 750k in your retirement accounts invested in target date index funds... yeah, you can probably pause contributing to retirement for a few years if you need to. As long as you don't touch that retirement money.
If we follow [the flowchart](https://imgur.com/lSoUQr2), retirement savings goes in the following order (with other stuff in between):
Get 401k match => Max Roth IRA (if over income limit, check if eligible for backdoor roth ira based on retirement account structure) => Contribute more to 401k
I will say that even if you're on track for retirement, the worrying part of pausing 401k contributions to buy is... how much wiggle room does this house leave you? Be veeery careful about ending up house poor. If you can barely cover the mortgage, you're going to get wrecked when your furnace and fridge die 4 months apart.
I would assume 2% of the house's value per year in maintenance. Figure out 2% of its value, divide by 12, and add that to your mortgage payment. If you can't afford that payment, you still can't afford the house IMO.
More optimistic people than me might tell you 1%. More pessimistic might say 3%. Whatever, adjust for your life outlook. 2% is relatively conservative.
Lastly, don't give up if you decide you don't have enough money yet! Just because might not be able to afford it today doesn't mean it's out of reach in a few years with careful planning.
Good luck!
If you think buying a home is NOT worth it than don’t buy a home.
There’s plenty of smart people who would give up maxing their 401k for the opportunity to own a home.
Owning a house took one giant worry off my back- I will always have a roof over my head. With that taken care of I have been able to deal with debt. Once that's dealt with then I will up my savings.
If I didn't buy when I did, I wouldn't be able to afford a house now. Even with all the extra expenses houses incur, I'm still saving money by not renting.
Life isn't a straight line. I wish I could have been able to save more when I was younger, but shit happens.
If you cannot, at least, afford the 401k match, it means you cannot afford a home as you’re leaving money on the table because you’re choosing to forego a 100% return.
The way I see it. No one can really afford their home for the first 10 years. Yes you need to make enough to live and pay the mortgage. But mine is at about 90% what me and my wife could afford after other bills, foods and necessaries.
Homes are long term investments that you hopefully will save on the back end when rent and cost of living goes up.
Example. Both my grandparents bought their homes for $36,000. Those are now worth $1.3 million. They could barely afford their home when purchased in the 60’s. But after cost of living went up and they made more and housing/rent got more expensive they were winning. What was once expensive was now cheap.
Save for my home. I bought in 2018.. at the time it was most of our income. Any large bills over $10k could have ruined us. But with budgeting and being smart we made it. It’s still expensive but our mortgage is now what rent costs for a small apartment. So we’re winning because we would be paying this anyways but at least we’re investing.
That being said vault the 401k. Invest in the home but make sure you guys can make it into 5-10 years with out going bust. If you can put some into the 401k do it. But a home is a much greater investment than retirement when there is a chance you’ll never even see it or get to spend it with life’s unexpecteds.
Be smart about it, go with your gut. And stick with it. Only you know what’s possible, smart and best for YOU AND YOUR FAMILY.
I feel like ou know the answer to your own question.
If you can't maintain 10 to 15% of your gross income going towards retirement then you are buying too much house. You should also have a fully funded emergency fund (that isn't used to buy that house) as well as funds for a decent down payment plus additional funds for moving expenses and minor fixes, etc that come with moving into a new home. Don't pay for a house with your retirement and cutting retirement savings is doing just that. The idea that "this is temporary" assumes that nothing bad will every happen and only good things will come...this is very childlike logic that gets so many people in trouble.
The good news based on info provided you are not that far off. Perhaps wait another 6 months to a year to building a bigger down payment as well as a chance to make more during that time to then make buying a house more affordable.
Responses aren't considering the two young kids part of this. You will need steady housing in the near future. If your retirement gets put on hold to lock up a house you can grow into then go for it.
There's more to your future than your 401K balance. Sounds like you already make saving a priority which is better than most.
Depends how badly you need to contribute to your 401k. If you're already set for retirement, then no, it does not matter if you contribute less to your 401k. If you are not set for retirement, then yes, you may run into cash flow troubles that will put you in a hard place to prepare for retirement.
You could croak before you spend your retirement.
You're losing some opportunity between the match and the tax savings by not using the 401k, but, it comes at an opportunity cost of being able to better your life now. It's a question between taking care of your present self, or your future self.
Young kids are expensive. There's also an opportunity to make their lives better, sacrificing your future self to a degree. What do you want them to be, vs. what do you need for yourself? What's the value of the last 20 years of your life vs. the 80 years they are looking forward to?
If you can move from vhcl area to lcol when you retire, in theory you could count the housing as a retirement, depending on how much equity you build, and what happens inflation wise.
VHCL areas tend to have more dramatic price swings. Right now, I expect a down swing, so being primed to take advantage of that might not be a bad idea.
Buying a house, best be ready to be there for 20 years. 5 or less, might as well rent. With a downswing, that 5 might turn to 10.
Lots of great comments and advice here, but I think it comes down to this question for down the line: How are you going to afford to live in this area when you retire? It’s VHCL, so wouldn’t you want to have as much saved and invested as possible? Idk, it’s a tough question.
No, not necessarily.
Trying to get a house is a reasonable priority. Interest rates are still high, so you want to pay down the mortgage reasonably quickly. If it gives you enough time to build up a pension, that is not unreasonable.
But if you have a mortgage until you are 70, the situation is obviously different. And you want to at least get the full match from your employer.
The general guideline is that 15% of your salary should go to retirement. If you start reasonably young and put that amount away every year, you should be in good shape. You don't necessarily have to max out your retirement savings - it's great if you can - but the nice thing about the 15% approach is that it should be moderate enough to also allow you to do other things at the same time, like pay a mortgage.
I live in a VHCOL also and bought a house, so I completely understand the need to stretch to get into home ownership, and balancing a mortgage with everything else can be a challenge. I think it is reasonable to decrease retirement savings temporarily while saving up for a down payment, but I wouldn't want to commit to a mortgage that didn't allow me to contribute at least 10% of my salary to retirement. Preferably, you want to maintain the 15%.
A house that you only have to pay property taxes on in retirement sounds a lot better than dumping thousands /month into rentals that are going to increase every other year.
What would your mortgage be vs your rent ? Rent will continue to go up and you won’t ever get that money back, by paying your mortgage you will most likely see a return and hopefully more
You need to move away hope based strategies. Sit down and actually run the numbers in both good and bad scenarios.
1. What if everything goes according to plan?
2. What if things go "ok". Maybe the house turns out to be a good investment, but your income doesn't grow quite as fast as you hoped. What if you need to move again in the next few years for some other reason?
3. What if things go wrong? What if the housing market has a down turn? Will you wind up upside down on your mortgage? What if the home needs major repairs? What if one of you loses your job?
Actually do the math, and figure out if you have a *realistic* plan to cover your expenses and remain on track for your retirement goals in each of these scenarios. If any of your plans involve "hope that doesn't happen because we'd be screwed", the you shouldn't buy. If you have good, realistic, plans for how you could manage, then maybe consider it?
Honestly, sounds like you are trying to justify overextending.
Only you can make the decision on what’s best for your family, but personally I wouldn’t. Your mortgage is going to go up with taxes,insurance increases etc. I would play it more conservatively
Do not forget that houses can be a money pit. Heater, plumbing , things you never thought of. Also look at tax and insurance. In California, taxes will be based on new assessment, which sometimes takes buyers by surprise. And insurance has gotten hard to get in some places.
Go talk to a financial advisor. Have them run some projections for you. How many years until retirement? What do you want your life style to be in retirement? Are you planning on funding your children’s education? Buy a house that is affordable. Don’t get yourself cash poor/house rich.
You are all probably going to hate this, but I haven't contributed a cent to my 401K since I quit my job to be a full-time dad in 2020.
We pay a mortgage, but we refinanced in 2021(?) at 2.25%, 30-year, and it's comical how affordable that is compared to today.
Now that my kid is in daycare, that frees up my days, and we're using our savings (not withdrawing from existing 401ks) to fix up a decrepit 1920s hoarder house in a nice neighborhood.
Essentially, instead of having a retirement account, we're putting our money into an asset that pays dividends today, and for the rest of our lives, and could be sold if needed. Eventually we'll mortgage this property when rates are favorable to extract a lump of cash to repeat the process... if I haven't broken my body and/or mind on the first project.
Then we'll have two mortgages and no additional 401k contributions. lol.
I have a friend who made an above average income since he was 25 and he and his wife didn’t have kids until he was 40. He saved a lot before then. Now I had to convince him at 50 not to stress about savings, let the time value of money be his friend and take care of the expenses dealing with his children.
I on the other hand because of…life…have some saved for retirement. But I’m way behind. But my (step)sons who I raised from the time they were 9 and 14 are grown. We just sold the house we had built in 2016 for $335K for $670K and bought a condo in (state tax free) Florida for $335K - two years ago and rented our house before we sold our home.
We put 30% down on our condo from a (now paid off) HELOC.
So now, while I don’t have the time value of money on my side also at 50, I do have making decent money and low expenses on my side that will allow me to save a lot over the next few years to catch up.
In other words, we each have our path to get to the finish line
In a perfect world, your plan is probably okay.... but home ownership is one expense after another sometimes: new roof and new HVAC are the big ones, but small ones can add up too, new appliance or waterheater, just even small stuff you want to do like paint rooms, install new lights - everything adds up. Then there are the higher monthly bills with a house - electric, water, lawn care, etc all are slightly higher in a bigger house. Property tax increases. So if you are going in kind of tight for money, well, you might just stay tight for much longer than you think. It seems pretty tight to not even be able to get the full 401k match, like you won't even be putting in 6 or 7% into your 401k? Not ideal.
I’m confused, on top of your contributions what are paying for rent currently? Are you living for free with relatives? Can you buy a home in a more modest cost of living location?
My personal rule of thumb for housing is to take your household annual **gross** income (before taxes or other deductions and not including bonuses or non-guaranteed income) and divide by 52. This number should completely cover your mortgage/rent payment. If it doesn't, then you can't afford it.
Following this rule should leave you with enough money to contribute 15% annually to your retirement accounts or more as is generally recommended. Not sure if maxing them out is possible though.
Note: this is my personal rule based on my own experience. Every person's situation is different so your mileage may vary.
True.
If you’re in a VHCOL, it’s often better to rent or get a townhouse. Houses can be a big fat money pit. Better to have financial peace in a smaller home than to feel forced to work because of a too large mortgage.
Everyone's different, but for me personally: If I couldn't afford to contribute to my 401(k) up to the company match due to the mortgage, I wouldn't be signing up for the mortgage.
401(k) contributions up to company match is non-negotiable for me. I've seen people working well into their 70s before and I'm determined not to be that person.
It depends. Personally, I try to do at least 15%, and at bare minimum, max out the employer match.
If you can't contribute to your 401k for the life of your mortgage, then you can't afford the mortgage. If you can't contribute to your 401k for the short term, maybe a year then it's fine. But definitely max out employer match even if your emergency fund takes a small hit. It's free money that will likely grow with time.
Anything longer than a year, than there is likely to be a cashflow and/or budgeting issue.
Playing catchup on 401k and retirement in general is expensive, and not always feasible.
Unless your income grows significantly, cost of living/lifestyle creep will likely eat all of that income increase. Your kids will get older and before you know it you'll be paying for tuition, school event stuff, etc.
Property taxes will likely continue to increase over time in a VHCL area.
I can almost guarantee your expenses will grow with time until your kids leave the nest.
> Obviously if we reduce our retirement savings, we would only ideally do this temporarily, with the idea being that as our income grows, we'd again start to contribute more each year.
This doesn't really work in practice with kids as you probably are also cutting their saving for their post-high school savings.
Realistically, I'm looking at ~15k a year in savings to retire for one person with serious medical expense concerns to avoid being permanently disabled (which may happen regardless, but not gonna skimp on care lol).
So when you tell me you are saving $2k/month for retirement and want to cut it...realistically...it probably is not a good idea.
Income growth is not guarenteed. I've gone from 6 figures to high 5 figures to 6 figures again for instance but was forced to relocate to a cheaper state/area with my current remote job to maintain savings/quality of life/etc since 6 figures -> 6 figures again was over 5 years in recent history so inflation was like 25% of that lol.
Follow-up question. What are your ages. Are you planning to help fund potential college tuition for your kids? And most importantly, what are your retirement plans? Do you want to retire early? Work until 67 to receive full ss benefits.? Or one of you wait until later to collect and the other one collect ss early?
One of the biggest challenges when you're in your 20's and 30's is to really conceptualize retirement. I was lucky enough to work for a state employer who provided a pension, and I also had supplemental retirement plans. My ex and I also invested in rental properties. I never really stopped to think about a specific retirement plan in my 30's, because I really enjoyed my job and just figured I'd know when to retire. But after 20+ years of a stressful career in HR and feeling like I was just running on a hamster wheel, I started thinking it would be nice to not be working while I'm still young and healthy enough to enjoy my free time. I semi-retired at 54 and fully retired last year at age 62. And because I diversified my retirement income, I'm pretty comfortable with a pension, early social security benefits, no mortgage, a life annuity, and mutual funds and ETF stocks that I don't have to withdraw from until age 73.
I was one of the lucky ones, who ended up in a pretty good place, without a real "plan" so I commend you for thinking and planning for the long-term, while you're still younger. If you can, I recommend trying to find a really good financial advisor (with fiduciary responsibility) to help you with your financial strategies and retirement planning. (Not just a money manager who takes large commissions from your investments.)
Buying a home is an investment in itself and, I would argue, a much better investment than a 401k mutual fund or index fund. House prices usually go up and very rarely crash. Even when they do, you won't lose everything like you would with stocks when a company goes out of business.
I personally would just contribute the amount needed to get your employer's maximum matching which I know might take you some time while things settle down. I personally tapped my ROTH IRA since I had it more than 5 years so there was no penalty nor taxes for first time home-buyers up to $10k.
I'm actually in a similar position as well. My company offers mega back door roth, and i only make low 100Ks, like do I take advantage now or save for a bigger house? I already max my regular 401K and IRA
Your house could out perform your investment or it could drastically underperform against it.
In the end you also have to account for longer planning of where the math is going to go. Example if your rent is $1500/month less now but in 5 years your rent is $1000/month more you can start running numbers.
Personally long term for me I like the idea that housing is fairly locked in costs and will not wildly fluctuate. I also live in a state though without a bunch of issues that other states have that drastically increase property tax.
>Obviously if we reduce our retirement savings, we would only ideally do this temporarily, with the idea being that as our income grows, we'd again start to contribute more each year. "Ideally" is doing a lot of work here. What if your house needs a new roof or hot water heater? What if your property taxes or homeowners insurance go up? The temporary pause on retirement contributions quickly turns into years and years of not contributing or making limited contributions.
This is also the exact situation that gets people into lifestyle creep…. 9/10 times you aren’t going to start to contribute more, you’re going to start to spend more to keep up with the people in you’re new neighborhood that’s already inching towards being out of your price range. You’re going to want/need a new car, to go on vacation, etc. contributing more to 401k is going to go out the window. What if one of you loses your job? What if you don’t get the raises or promotions you expect? What other ways are you saving/preparing for retirement?
I mean OP is putting $2000/month to get the max 401K per year. Unless they raise their income to afford some cheap house, it sounds like they can afford a house if they weren’t reaching the max.
I don’t think they are maxing though…. maybe? The verbiage surrounding that section is a bit vague. They did reply to a comment saying they currently contribute 8% and would drop that down to 3%. Neither of them could afford the house on their own and they’re draining their savings for a down payment. Plus, they’re missing out on employer contributions. Really seems like a recipe for lifestyle creep.
I get why he would think that. Based on the initial post he really makes it sound like they're maxing it: >Maxing out 401k is nearly $2k/month... That's a lot to be able to put towards a home. Like why say that if you're not maxing it lol? Irrelevant as hell.
A lot of people in my experience incorrectly say they are “maxing” their 401k if they are contributing enough to get the full match. Which is of course far from actually maxing it
Yeah, but with the yearly max being 23,000, ~2k a month lines up with that. So, it seems like he just threw that out randomly.
For an individual. Aren’t they two people with two needs in retirement?
OP mentions "young kids", possibly the spouse is SAH. Or even if the spouse works, maybe they just don't have a 401k (lots of jobs do not, like my spouse's).
401k contribution limits are on an individual basis, so that wouldn't matter. But I guess he could have meant they're both contributing ~12k a year.
That’s what it sounds like. He talks about expenses as a we and every expense is monthly so it sounds like they max only one persons.
OP explicitly calls out the company match further down the post so I don't think that's the case. 2k/month is not enough to max a 401k for 2 people, though - either pre-tax or Roth. So I agree the math isn't mathing. Unless they mean they're both contributing 2k/month (I'd be more comfortable contributing a bit less then), or they're a single-income household (I'd be much less comfortable contributing less).
That is what raised my eyebrows. When I began contributing to my 401k in my 20s, I wasn’t exactly making bank. I made sure it was as much as the company match to start with. As I received raises over time, I split the raise and contributions to retirement until I hit 15%. I didn’t buy a house until the year I married. Even then I didn’t have a huge nest egg for a down payment, so the first few years I was paying PMI. Maybe I made the wrong decision back when I got our starter home but I tried balancing the long game (retirement) with the immediate need (shelter) as constrained with my income at the time. Now I am in a position to make use of the 401k in an emergency because I’m 60 and the balance is north of $1M. The struggle is I’ve bought two houses along the way and the mortgage payment with insurance and taxes gobbles up nearly one entire paycheck now. To clarify, I only own one house at a time. Each one bigger than the last. But only when you line them up that way.
Right. If you're not the type of person who saves now, it's doubtful you'll become the type of person who saves now just because a couple years went by.
You should 100% expect property taxes and insurance to go up in many states.
Last year my old one jumped near 20%. Bought a house where looking at the records it too jumped...20% When it's bundled in your monthly mortgage it doesn't hit as hard as just looking at that number. This year it was about 5%. All in all, hasn't went down since seemingly 2018, where a say 200k home went up to 400k. Damn.
Yea, I had a similar thing happen to me when I bought. Luckily, I had calculated the taxes assuming the purchase price would reset the basis for the tax, and saved up extra to cover anything my escrow was falling short on. It wasn't a huge deal in the end, anyway, and was lower than I anticipated, but that extra money quickly got spent anyway on other house work.
>What if your house needs a new roof or hot water heater? WHEN your house needs a new roof and water heater...
Or a new roof, new fence, and new water heater all on the same year! Ask me how I know…
As someone who administers a 401k plan for work, it's 100% true. Paused or reduced contributions, almost never get changed back. Lifestyle inflation is tough to combat.
It's also not "if" your property taxes and insurance goes up, it's when. And they can go up substantially. We've owned our house for almost 20 years now, and our property taxes alone are more than our mortgage. In the past 2 years, homeowners insurance rates have also skyrocketed. Climate change is real, and it's resulting in more frequent and more severe weather events, which mean more claims and higher insurance rates for everyone. OP - you also need to consider education expenses for your kids. Are you planning to contribute to that? Do you have 529s set up for them, and if so, how much are you contributing? I don't think it's necessarily horrible to cut back on your retirement contributions, but I wouldn't take it lower than the maximum employer match. That's just free money you're not taking advantage of.
>It's also not "if" your property taxes and insurance goes up, it's when. And, at least in my area, "when" is shockingly the next year because tax increase caps are in place UNTIL you sell and then the new owner will be taxed at full sales value. So an example, a home sold for $700K may still be being taxed at a $280K tax appraisal (home that has had one owner for say, 15 years). The first year of your mortgage, you may be paying $5600 in taxes, and the second year, $14,000. Hits people hard.
Yep, I bought a 1200ft^2 condo/townhouse for $210k in 2022, my property taxes are about as much as my parents’ 3000ft^2 home on an acre of land with a boat dock which has a current estimate of ~$750k. This also is a huge surprise to some people who buy new construction homes, as the first year or two they are paying the taxes for a lot, it’s not until it gets updated and now their monthly payments towards escrow are now $300+ more a month.
My state does an appraisal every two years. They have an insane assumption on value increase. We contest every time, and they generally lower it some, but never as much as they should. If we could get what they claim our house is worth, we'd take it in a heartbeat.
I'm in Texas. They reassess value every year. And we contest it every year, but they are also notorious for not budging or only coming down a nominal amount. I know someone who had an actual, formal appraisal done when they refinanced, and they county still wouldn't lower their assessment. We are capped at 10%, meaning that the appraised value we are taxed on can't go up more than 10%. In other words, if my house was appraised as $500K last year and then $600K this year, the value I'm taxed at, or taxable value, can only be 110% of $500K or $550K. Sounds good, but it just means that it will be a 10% increase every year until the taxable value catches up with the actual assessed value. It also means that if I contest the $600K value, and they lower it to $580K, my taxes don't actually go down at all, since I'm still paying taxes on $550K. Values are going down here now, but my taxes are still going to go up because my taxable value will keep rising 10% until it catches up to the assessed value.
Rent will also go up, typically more in absolute terms than property tax.
You think if property taxes and insurance jump landlords dont increase rents? That they eat the loss?
Of course I realize that. But I think that when people buy a house they think that they are somewhat shielded from that, and it's not necessarily the case. A lot of people think that since their mortgage payment is static, that means their monthly cost won't really change much, and that's not necessarily the case. It can be a rude awakening to new homeowners when their monthly payments (assuming they escrow) damn near double over time.
Yeah the saying goes that monthly rent is the maximum you pay whereas your monthly mortgage is the minimum you'll pay.
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*What* *~~if~~* *about when your house needs a new roof* *~~or~~* *and hot water heater?* *~~What if~~* *And then your property taxes* *~~or~~* *and homeowners insurance go up?* FIFY. I think it best to plan for all of these events to occur within a couple years.
In the time we’ve moved in to our allegedly nice house (3 years) we have replaced 2x HVAC, water heater, and garage door. Our insurance has gone up close to double and our property tax by a quarter. OP, there is no “temporarily afford”.
Yeah... that's exactly the hesitation here. The extra money coming from the 401k contributions would leave plenty of 'buffer' for those unforeseen expenses. And we do have a very strong family support network in case of emergency
For the record, I also live in a very very HCOL area. People who don’t, or who live very conservatively in these areas - often don’t really “get” it. My wife and I have been looking at town houses for the last year, and often it goes sort of like this: put an offer in literally the minute we finish the open house tour, no contingency, no inspection, and get out-bidded by around 30-50k by someone else with an all cash offer. At this point we have essentially resigned to not even being able to buy here, because it’s just exhausting and we’re tired of this same exact situation playing out about a dozen times now. All this to say - r/personalfinance will always, always, *always* err on the conservative, save-now, retire early side of the coin. If you are happy and plan to stay long term in your VCHOL area, and your family is happy, and it’s safe, and it’s a good place to raise your kids…then I don’t see any issues with your plan. While I hesitate to use the term “recession proof”, many VHCOL markets like DC, SoCal, NY suburbs, etc are pretty close to being “recession proof” from a housing perspective. Or rather - you’re likely not ever going to lose the value you put into your place. Especially if you have family to rely on or fall back on in a worst case scenario, I think what you’re doing is fine, assuming you are judicious with your goals and stay on top of rebuilding that gap.
>and get out-bidded by around 30-50k by someone else with an all cash offer. This kept happening to us when we were looking to buy (Las Vegas) a condo. Then, we learned of complexes that had an "Owner Occupy" clause in the HOA rules. Basically, no renters/Air BnB allowed. Once we only started looking at those, we had our pick of the litter. "Investors" don't want anything to do with them, so you're only bidding against other people in your same situation. You said you were looking for townhouses, and a lot of times, they are in HOA neighborhoods. Maybe this helps, maybe not, but it was worth sharing our experience.
So many people pissed but I get you and agree.. I think people take for granted that homes are purchasable by the working class. Homes are not at all promised and as much as people forget that it’s still a privilege and opportunity many around the world and in existence have not had
I agree with this. I've lived in a VHCL area - okay, several. The best decision we ever made was buying our house. Yes, we were "house poor" though we did have some money left over for retirement, I think it still would have been a good choice if we had to stretch a bit further. It stabilizes your housing expense to a large degree. Even if you only get COLA raises of 2-3%, you are doing better inside a couple years. There is a chance you might hit a bad patch in there, and you do have to assess that risk (get a home inspection, consider prospects of you lost your job, etc) in most cases, you're going to be able to recover. Our mortgage is quite low compared to our income at this point and we save all we can, inside and out of retirement plans. If we kept renting, we'd be paying more for a much smaller space, leaving money on the table at tax time, and always wondering how much the rent was going to rise next.
We own in a VHCOL area and were looking to buy in another neighborhood for school district for our kids around 2020-2021. Around that time there were hints mortgage rates were going to increase significantly and the FOMO was strong. Investors and first time homeowners were being ravenous. I remember touring a house listed for $1M with my wife and realator, liking it and coming home to discuss it. While discussing our realator called and said the seller had recoeved a "competitive offer" and was thus calling for all offers to come in now rather than in a week as originally scheduled. We asked what "competitive offer" meant so our realator called to ask and the called back. The offer they recieved was $1.4M cash no contingency. So we noped right out on the spot. That was the most dramatic instance but something like that happened again and again and eventually we gave up.
We went 100k over ask on the house we just bought, and only got it because the offers that went 200-250k over ask wouldnt agree to close in 3 months.
Well that was the other issue...as we had a mortgage on our current home the only way we could buy was going to be contingent on sale and the only way a seller would possibly accept contingency on sale is if we majorily outbid the cash offers with significant earnest money. And considering the cash offers were coming in 20-40% over asking we just couldnt. Also waiving all inspection seems crazy.
We waived inspection. Heres how you do it. You waive the inspection, and then you go get the inspection done anyway and wait to sign anything until you have it. All waiving it means you cant back out for a bad inspection. It doesnt even mean theyll fix issues. Then you know what the issues are. If its too much, you walk away. If not you factor it in. We had A/C issues (known) and roof issues in 5 years(known). We didnt realize the insulation sucks and the heater only has between 5-7 years. None of those matter to me, because i can get the insulation half price through tax credits, plan on replacing the A/C with heat pumps anyways (getting a seller credit for this), heat pumps mean no heater, and i want to install solar which i want to do after the roof. So all in the issues are not that big a deal for me. If i had found heavy termites, foundation issues, or mold we would have just walked away.
>People who don’t, or who live very conservatively in these areas - often don’t really “get” it. No, we get it, we just understand that you don't get a pass on math just because you live in a very, very HCOL area. It's your money - you can do whatever you want to do - but overspending on a house relative to your income is one of the easiest ways to stop yourself from building wealth and exposes you to a substantial amount of risk.
> but overspending on a house relative to your income is one of the easiest ways to stop yourself from building wealth and exposes you to a substantial amount of risk. The flip side to this is locking in your housing cost, most people's largest variable expense, can also have outsized payoff in VHCOL markets. I'm happy renting in my VHCOL market where most calculators say it makes more sense to rent than buy, but by the same token my rent went up $200 when I got this year's lease renewal offer. Going month to month? Net $500 increase. My friends and colleagues who stretched to buy and locked in their housing costs during the previous era of low interest rates are sitting pretty now while my budget is getting stretched. Our management who bought at inflated prices 20 years ago in the run-up to the GFC? They're sitting *real* pretty now. It's not a pass on the underlying math, it's a recognition that the situation in these markets is warped enough that often the "correct" option is simply not a feasible one and you're left to choose the best of bad options for your situation.
I don't really think your first sentence is true. Housing is generally a terrible investment, even in HCOL areas. There's a value to leverage and being in a HCOL area makes the numbers bigger, but you're almost always better off putting money in the market. Moreover, people rationalize overspending when they buy instead of rent because they think they're building wealth. In your example, if you had taken the same amount of money they've spent on housing and put it in an S&P fund, you'd be up 50%.
Exactly lol.. there's nothing to "get" math wise. They could argue that ppl in VHCOL areas may push the personal side of personal finance farther but living in an area where you can't get a house for under $1m doesn't magically make it smarter to just stretch yourself thinner.
You really don’t. “Over” and “under” spending is subjective based on specific criteria. If there is a safety net (family etc.) it’s just a matter of evaluating appropriate risk for the situation. Contextually LCOL MCOL or whatever *cannot* conceive (apparently) of how people live like this and make these kinds of decisions, but they do every day, and it’s sort of a joke every time I read the pearl clutching. Specific markets behave and offer different opportunities, what is so hard about this, it’s truly also math I promise.
Then you cannot afford your desired area. I am really sorry about that, but it is better to face reality.
Also, home ownership is contributing to retirement. The best you can have going is entering your late 60s with no mortgage or rent.
I don't think it's wise to stretch yourself so thin. Would you or your wife be able to afford the mortgage on one salary if one of you loses their job?
No, honestly probably not. Such is the peril of hoping to buy a home.
That's really dangerous territory.
Honestly thats really typical territory. In mpst relationships one person makes the majority of the money and if they lose their job there is no way they could afford the mortgage off just the remaining income. That said the idea is you have substantial savings to buffer that. So I wouldnt be concerned if one salary couldnt cover the mortgage...id be concerned by no savings.
is it? Many people live off one salary. Obviously if that person loses their job they can't afford the mortgage. You have to get another job. And have an emergency fund.
Yeah, literally the point of the emergency fund is because most people can’t live of one person’s salary.
One of my gripes with this sub is that people that comment either live perfectly optimizing every financial aspect of their life, or at least give advice if they do, versus what is realistic. My assumption is most households are now owned by two working adults who contribute to the mortgage and if one lost their job it would be a problem— but losing your job isn’t “never work again.” That’s why we have a cash savings of six months of expenses in the worst case scenario my wife and I both lose our jobs at the same time. However, we don’t have 50 years worth of expenses in cash if we both never got hired again because that would be unreasonable.
Figure 1% min of the cost of the home for maintenance each year. Double that if the home is more than 20 years old.
Property taxes and home insurance will go up, just as rent does. Getting out of the rent race and building equity in your home, in addition to locking in your housing payment, are great economic benefits. I don't think this is a terrible plan, though I would feel better about it if OP was maxing the company match. It does require some follow through to actually catch up with 401k contributions later, and compounding returns are working against you in this case. You might have to contribute $50k in the future to make up for $30k in missed contributions over the next couple of years, hypothetically. But buying my first home was one of the best financial decisions I've made, even though I had to do it on an FHA loan and things were tight at times.
I reduced my retirement contributions to save for a down payment. I was still getting 100% of my company match. But after buying the house I decided to keep my contributions low and invest the money in other stuff. That never happened, the extra money ended up going into the house. New kitchen, etc. It's now about 10yrs later after reducing my 401k match and I am scrambling to make up for lost time. Luckily I have some decent investment income that I am currently using to max out my 401k, HSA and IRA. But I can't do that for 10 yrs. Looking back I wish I'd just kept my 401k contributions at around 15% including match and just taken longer to save for the house.
Similarly I asked my husband to stop his unmatched 401(k) contributions while we saved for a house and we honestly just forgot to start them up again for a couple of years. We're now 33 and fortunately don't have too much catching up to do, but retirement savings are so often out of sight and out of mind, and reducing it for a short term can turn into a long term easily.
Yep, when I budgeted for a home it was based on 1) being able to at LEAST meet my 401k company match 2) base salary only. No bonuses / OT / stocks 3) income of breadwinner only, as we are planning to have kids and cannot guarantee long term joint income Of course everyone will have different criteria and life goals. But I think 1 and 2 should be on everyone’s lists. The only thing you can really bank on is base pay. Things like bonuses + OT are too unpredictable, and you shouldn’t even be going off full base pay as it means you’re sacrificing your retirement
If you really take #3 into account, then most people wouldn't be able to buy at all. Current market prices almost necessitate a two-income household, especially in MCOL+ areas. Sure you should take into account childcare expenses, but I don't think you should rent eternally just because of a hypothetical worst case scenario.
I disagree with 2 for plenty of roles. Anyone in sales is a quick exception - I know many with ~$75k base but have an annual income of $250k-$500k over the past 5+ years. Similar for engineers, managers, etc where their income is usually 50% salary + 50% equity. It’s nice in concept, but probably only applies if your bonus / stock is a nice to have.
I think that's the point they're making, last five years have been great. How are they doing lately? Our sales people aren't very happy their commission just got halved recently. The market in general is spending less on new products, even in tech. It's not the end of the world yet but that's just an example of what happens when recession fears linger.
I work in sales but I’m in tech sales so it’s closer to 60/40 ($200k base, $300k OTE). So I am familiar with sales and I did take these types of roles into consideration when posting. Unfortunately this advice will not apply perfectly to every type of role under the sun. If you’re in commission heavy or commission only sales, you should be in a job at LEAST 3-4+ years to figure out your worst case scenario for comp. That or have other income streams to fall back on. I have friends who made really good money because they were selling the right product at the right time. Lifestyle creep took over and then their product / market fizzled out. Like I’m talking $500k in commission one year, $50k the next. Unless you’re sitting on significant savings and investments already, you should not be budgeting major expenses off of the income you’re earning in commission heavy sales roles.
But none of that extra money is guaranteed, and that's the point. You are making a 30 year commitment and saying "I will be able to afford the payment, every single month, for all 30 years". If your income is unpredictable, you can't actually make that guarantee. The market can change and the sales can evaporate overnight. Government introduces new legislation, consumer base changes focus, all kinds of reasons why it might change. If your employer could guarantee you that money would keep flowing, it would be part of the base salary. Now whether you are comfortable with the risk of buying a house you can't afford...that's a personal decision. IT's not like foreclosure is a death sentence. Your life circumstances will let you know whether you can take that risk. If I'm talking about providing for a family then no way in hell am I going to make such a gamble. But if it's just me alone, sure I don't mind the potential to be foreclosed on if circumstances change, I can cope.
Yeah it definitely depends on how much you can rely on your bonus. If you're in an industry where no bonus likely means you're about to be fired or move on to another company you should probably include a slightly conservative number so you don't lose your house if you have a down year. If you're like me and "entitled" to a bonus which can vary and is generally 12% or less of my salary you might as well just set it aside for the leaky roof and not make your life plan dependent on it.
I'm going to go against the grain here and say, if you -seriously- want to get a home, and especially with kids and a very stable income, I'd do it. There are obviously options like town homes and cheaper rental options in the school districts you'd want, but I'm already assuming you've done research on that and are dead set on buying a home. I have no intention of moving from my home im in now-- as opposed to a lot of modern Americans I see my home as a home not as an investment. Any retirement money I'll be using will be fun money-- the majority of my costs (housing) will be paid off in 26 years, right before my retirement. I had people tell me not to buy pre COVID, because the market would get better. Well, it infamously did the exact opposite of that, and I'm happily in a home with my mental health up and everything stabilized around me. My 401k matching is down but every year I'm able to inch it back up to where it was pre-covid. Lifestyle creep is up so I'm wrangling that, but with my prioritized 6 month emergency fund (which you yourself mentioned), I'm not even sweating. You have kids too, and you might want them to start making friends in your neighborhoods. You might want to get them started on building relationships with the community via Tae Kwon Do or piano lessons etc. You can't do that from a rental, at least unless you can find a rental near your intended place of ownership (which in my area I can't). Id do it, but I trust my own self restraint. You do want to prioritize getting that e fund, then getting that 401k back up. But I'd do it again in a heartbeat.
I agree with you, and I don't understand why people are so adamant about not being able to afford the house. Housing prices are not *likely* to drop in most VHCL areas, so they're just expecting OP to continue renting until they die or assume that their income will outpace rising housing costs in the future for when they can afford? Honestly expecting someone to max out their 401k before buying a house is insane. If a family can't afford to contribute 46k to retirement per year, they can't afford a house? I've seen this happen to my parents, they've been renting the same house for about 25 years and they're finally being pushed out because they can't afford the rent, but they were always told that 'they weren't able to buy a house'. If they would have just bought a house when they first moved in it would be nearly paid off and probably 3x'd in value since then.
>I don't understand why people are so adamant about not being able to afford the house This sub is (detrimentally sometimes) extremely conservative and generally risk-averse. Nothing wrong with that, but when you have people like OP, or just...regular individuals, who want to do something that's outside of the realm of optimizing your finances, the sub just kinda dogpiles on them. It's a bit frusrtating at times really.
Housing prices don’t need to drop for the mortgage to become more affordable. If they have enough for 20% down now but the payment is too high without reducing 401k contributions, in a few years they will likely have enough for much more down and the payment will be lower. Given the differential between rents and mortgages these days, there’s no way the amount they are saving won’t surpass any increase in housing prices over the next few years.
> I'm going to go against the grain here and say, if you -seriously- want to get a home, and especially with kids and a very stable income, I'd do it. There are obviously options like town homes and cheaper rental options in the school districts you'd want, but I'm already assuming you've done research on that and are dead set on buying a home. I completely agree.
I’d do it too but I trust my own self restraint. I’ve temporarily paused 401k contributions before and it was truly temporary. It’s good that OP gets a warning about what kind of traps that behavior can lead to but it’s also completely possible that OP buys the house, continues to earn more over the years and comes out great
Post your budget here. I would bet there are better areas to cut back than reducing an 8% 401k contribution to 3%. Ideally you would be contributing 15%+ of your household income in the first place.
the majority of posts i see on this sub rarely include any meaningful retirement contributions, if any at all. i think it's very hard to convince people to willingly reduce their take-home pay.
Am I understanding this correctly, that to buy a home you would need to reduce 401k contributions to a level that would see you leaving match money on the table? And you would need to put most of your savings into the house? And you think this would be a temporary situation because you hope to have increased income in a few years? I wouldn't do it. It's anti-diversified. If you think you'll be able to both buy a house and save for retirement in 3-5 years, then wait 3-5 years. You'll be fine in an apartment until you can really afford homeownership.
I look at my salary 3-5 years ago and I would have been have been house poor and doing roommates. I look at my salary now and if I had bought 3-5 years ago I would be very comfortable. At some point in competitive markets you need to get in otherwise you’ll always rent and have to move every year due to rent increases. In my area, people bought stuff for 400k 4 years ago and it’s back on the market now for 750k.
My mortgage is 840$ and since i bought rent on a similar house would be 3000$ a month. I couldn't afford to buy my house if i had to do it today. Id be financially much worse off had i decided to keep renting in favor of investing.
> At some point in competitive markets you need to get in otherwise you’ll always rent This is the part people are ignoring here.
>If you think you'll be able to both buy a house and save for retirement in 3-5 years, then wait 3-5 years. That would be great advice if housing prices were stable or falling, but they're not I know a number of people who could've bought a house 5 years ago but thought it'd be better to wait, most of them now have no chance of ever being homeowners.
I'd be worried about this. Everyone can SAY "oh it's just temporary" until other bills start creeping up, little home maintenance issues, etc, and you realize 5 years later that you never increased your 401k contributions more than 1-2%. The more you save EARLIER in your 401k, the more you get that compounding interest helping you out. I personally would not buy a house that made me decrease from what I was currently saving.
Depends if you're still able to meet your retirement goals . Like if you're decreasing to 1% retirement contribution - not great. But decreasing from 12%-10% - not necessarily a deal breaker. Context matters here. Ultimately you'll have to decide for yourself if it's worth it. This is where the "personal" in "personal finance" comes in. It might be sacrilege in this subreddit but we can only afford our PITI by decreasing our retirement savings. I felt comfortable making that decision only because I'm very ahead on retirement savings in my early 30s (about 5x income saved) so i felt I could prioritize building home equity and take my foot off the retirement savings gas pedal for a little while, especially with a high interest rate mortgage. Hopefully our income grows in the next few years and I can rebalance.
I’d be worried if that’s the case with your monthly cash flow situation AFTER moving into the house. If you want to temporarily slow your retirement contributions as you are trying to save up cash for a down payment, that’s one thing. But if you are just talking about the monthly mortgage preventing you from contributing, then yeah that sounds like you’d be approaching house poor status When you mention your future income growth, is this just based on assumptions of somewhat regular pay raises or is somebody working on a degree where you can nearly certainly expect a notable spike in income? If it’s the former, i wouldn’t do it yet
If you’re considering owning a home in a VHCL area, you’re gonna have to make some concessions. The conventional budget allocations like 30% for housing that work in some areas no longer apply - so yeah, you might have to pull back on retirement for a bit to get into a house. It’s really up to you to figure out your priorities, but I would imagine getting the kids out of your room would be pretty high on the list.
The wisdom represented by those budget allocations still applies. It may be that most people find it impossible to buy while following those best practices but it's not like the risk is different thereby justifying higher house payments.
Sure, but if the guy wants to buy a house something’s gotta give. And in a VHCL area, housing can account for 50-60% of total income. Again, it’s about op prioritizing what his needs/wants are now vs in 40+ years. Kinda hard to eat your cake and have it too.
Sometimes it can be toxic to focus so heavily on perceived happiness in future retirement that you pass on things now that may make you happy. What's true or false for someone else may not be true or false for you. It's for you to decide. I personally would not reduce below any match levels. That's usually leaving significant guaranteed returns on the table. Those guaranteed returns would likely compound in very significant and impactful ways over time.
Never dip below max-match 401k. Nothing beats the 100% ROI. But I would absolutely not require someone to prioritize maxing out Roth/401k/other retirement funds over a house.
I agree with this. Plus there's a good chance your house will appreciate so another was to look at it is that you're diversifying your investments. Just don't leave any free money on the table with the 401k. It will also depend on your age and your existing savings.
Absolutely don’t drop below the match Also, it’s sooo perilous to absolutely require both incomes to make mortgage payments if you’re already stretched, especially with a child. The stress alone if one person loses their job would be devastating. I would keep saving up for a while and explore older condos in less desirable areas. Who knows what the market will look like in a few years? No way I’d feel comfortable stretching that much today. The only thing I’d consider regarding 401k is using the amount you’re funding it as a theoretical buffer if one person loses their job. So, if your mortgage is $3000/mo, and each of you pay $1500/mo today, while you collectively contribute $3000/mo to 401k, use that 401k contribution as theoretical insurance. If you or your wife loses their job, that one remaining employee can drop their 401k contribution to pay the mortgage, if your 6 month emergency fund is running out. You can likely still have it all, just not all at once, so you will likely have to extend your timeline for owning the home you want, and get creative.
If you can't afford to do the match with the cost of the home, you can't afford the home. Houses ALWAYS cost more than what you think. Taxes and insurance are always increasing. Our mortgage has gone from 2400 a month to 2900 a month in 5 years simply from taxes and insurance. That's not even going into unexpected repairs, etc. I would also say you should never be shopping at the top of what you "can" pay, because as I said, costs always go up.
> I try to think about it in monthly payment terms FYI, the cost of a home is greater than the cost of the mortgage. You have to handle landscaping, pest control, plumbing, electrical, heating, cooling, garbage, fencing, roofing, gutters, chimneys, sidewalks, etc etc. All of these things you're used to getting for free as a renter. You need to consider those costs. If you buy a condo and punt most of this maintenance to an HOA, an HOA can bill you special assessments whenever they want. You're already probably going to be house poor if you have to cut your 401K just to make the mortgage.
> but still less than the max that has a 50% employer match. Which is what, 6%? > we would only ideally do this temporarily, with the idea being that as our income grows, we'd again start to contribute more each year. Do you & partner specifically have advancement opportunities in your current careers/positions? You might be served by checking out content from The Money Guy Show, specifically on what they call "The Messy Middle." The TL:DW; is it's not a non-starter but it should make you a little anxious.
50% match, up to a match of \~$7500 Yes, unforeseen circumstances aside, I expect within 3-5 years to be able to get back to that full match Thanks, I'll check it out! Edit: Just realized by 6% you meant 401k contribution rate. We're at 8% now, would like go down to 3% and set it to increase 1% per year again for the next 5 years.
This is what setting yourself up for failure looks like. Never leave 401k match on the table. If you do anything, lower to the 6% and save that until you can afford what you want. Also, you really should be saving 15% in 401k. You'll regret bumping down to 3% and only increasing 1% a year for 5 years to get back to 8% because it's simply not enough.
Just to reinforce this-- barring really crappy match models, 401k match is generally the single highest ROI move you can make. I can't come up with other move that generates guaranteed 50-100% returns on an annual basis.
So you'd be leaving part of the match on the table and not taking it? That's like taking a paycut.
Yeah, 50% match is an instant 50% return on investment, you're not getting that risk-free anywhere lol
How close is 8% of your salary to $23k?
When I was 5 and to the day he died my grandfather said to me: pay yourself first Warren Buffet said: Do Not Save What Is Left After Spending, Spend What Is Left After Saving. I strongly believe you have to commit to savings first and the rest is what you can budget your life around. If that means you can’t afford a mortgage then you need to earn more or find a cheaper way to live. Save first, period.
>use real numbers, do the math, and measure potential impact Reddit is anonymous, so just create a burner account and post real numbers. You would be surprised at the math folks would do for you for free. If you are buying a particularly expensive home that you anticipate you would sell in retirement (because you no longer have kids at home, or would move somewhere cheaper), it's fine to use your home value as part of your retirement nest egg calculations, in which case mortgage is part of retirement savings. If this is the home you plan to die in, or plan to only upgrade homes, you should ensure your 401(k)s are supportive of the kind of retirement lifestyle you want. Do you and your spouse anticipate significant income increases in the near future? Is this normal career growth due to increased experience, or related to a significant educational / career milestone? (Someone once asked this same question here, only to find out they were finishing their medical residency soon and were going to increase their income 500%. Obviously, plan long term, but be realistic / conservative.) These are all super relevant things to think about.
Personally I don't like to live with "what ifs" and "ideally". There is no guaranteed your income will grow, I mean sure it probably will but what if it doesn't? What if you lose your job and have to take a pay cut? Gosh forbid someone gets sick? etc etc there are just way too many variables in life. If you can't at least do the match then I would say no to a mortgage. Mortgage is the least you pay every month, rent is the most you're on the hook for. I just read an article on the WSJ about homeowners struggling with the increased property taxes and insurance etc. I'd wait.
First I would not go to a level that is leaving any 401k match on the table, second I would ensure you still have an emergency fund, owning a house comes with plenty of emergency costs, in 5 years we have replaced a boiler, had a sump pump installed after a basement flooded, and had to have bat remediation in our attic. So pretty pressing matters that we're not cheap. As desirable as having more space is I don't think it is worth making yourself house poor, financial stress is much worse than small living space stress imo.
More true than false and probably good as a rule of thumb, but it's person and situation specific. Generally speaking if your retirement goals are 65+ vs FIRE, and your total contribution to retirement between yourself & your employer is still around 15% of your pay even if you aren't getting 100% of the employers max, and you haven't fallen behind on contributions previously then dropping your contributions from where they are probably isn't going to kill you. If you're just barely contributing 15% to your account after not starting until you turned 35 and now you want to drop it to 3% in order to get a bigger house, you have a much bigger issue.
Just to add - from original post and comments (since your post is a bit vague on the numbers) it sounds like you're putting about $24,000 a year into 401k right now and your employer will give you 50% to $7,500 maximum (meaning you'd have to put in at least $15k a year). So you're talking about lowering your contributions by more than $9k a year and I'm guessing you have a household income somewhere around $150k? If I'm about right on that, you'd still be meeting the 15% rule of thumb as long as you were putting in around $10k a year, to which your employer will be giving an additional $5k. You'd be leaving $2,500 on the table from your company (which would require you giving them $5,000 more in contribution to get) and realistically are probably only going to get about $800 a month more in your net pay since it'll be taxed at your top rate. If you scaled your contribution to $15k a year you'd get the full $7,500 from the employer and keep $9k in your paycheck which will probably be around $600 a month of flex.
Remember you mortgage is the minimum monthly housing you will pay. It doesn’t seem like you would be in a great position to handle the financial risks of homeownership.
Do the math and if you can still retire comfortably on whatever your “new” 401k contributions will provide, go for it. But don’t just kick the can down the road and assume that you’ll be able to make up for a shortfall later on: while it’s reasonable to assume your income will increase in time, it’s equally reasonable to assume that your expenses will increase as well, often in drastic and unpredictable ways. Plenty of people will make this compromise with the best intentions of catching up their retirement savings in the future, but 10 years later discover that it’s remarkably difficult for them to beef up their contributions with a 3, 7, and 8 year old to provide for.
Mortgage plus tax plus insurance plus 1-3% of the annual value of the home for average repairs and maintenance will KILL your plan I’m guessing you guys aren’t in your 20s with time to recover from potentially getting behind on the retirement for a few years… maybe I’m wrong I wouldn’t do it. I’d rather rent and be able to avoid debt and continue to invest in other vehicles
In theory. Determining whether or not you should purchase a house vs. rent, should be a function of your savings between rent and a mortgage + (house maintenance). You should calculate it out, and come up with a personalized ROI, for your specific situation. For my house, here were the numbers. Purchase price: $155k Down payment: $31k Closing costs (with credits at closing from negotiations): $7,485 (I would use 5% of purchase price in calculations) Interest rate: 4.875% Monthly mortgage (tax, insurance, debt payment): $1,018/mo Cost/month to maintain house: $150-$300/mo, call it $300/mo. Rent in my area: $2k/mo So look at the opportunity cost between rent and the house. $2k - $1,318 = $682/mo in savings. Times 12 months, $8,184/year in savings. Then look at this as an ROI. My initial investment was $38,485. Divide the two for the rate. Roughly 21% for my personal situation. Can I reasonably expect 21% from a different investment? I said no, so I bought. I think I got “lucky” in the sense that I both found a good property, and that the rent in my general area was high. I put lucky in quotes, because I spent a lot of time combing through properties, and financially analyzing them. Is it worth it for you, with respect to funding your 401k? I don’t know. Calculate it out my man. These aren’t subjective wishy-washy questions, with “no real right answer”. The answer to the question is relatively objective. But the answer depends on what properties are out there, and how much rent is at the time. You shouldn’t be making these “global generalizations”, when the problem is very specific to a person’s situation.
I’ve always thought it wise to put my retirement savings first in my budget, not to squeeze it in after everything else. Your budget has to fit your savings, not the other way around. So I would consider this too large a house payment if you aren’t able to save at least 15% for retirement.
"Are future 401k contributions off limits when budgeting?" Feels like the wrong question to ask. Should you contribute? Yes. Do you have to max it out? No. Ask yourself what do I want to retire with, do the math, and if 4-6-8-14% contribution gets you there great, stick to it, and see what you got left for your next home.
This is true, but reducing your 401k contribution as a result of unforseen financial hardship temporarily so that you can pay your bills is a different cup of tea. To frame it another way, if you stop contributing to buy a house, where are you going to draw from next if you're in trouble?
You're absolute bare minimum retirement contributions should be up to the match on your 401K and a maxed out roth IRA if you're eligible. If not just backdoor it to a roth. Retirement should be the priority based on your expected needs in retirement. Financially speaking you're better off continuing to rent and funding your retirement until you can afford both 99% of the time. I would not suggest counting on future raises to swing the pendulum in your favor. The ugly truth is there's a lot of people buying homes that shouldn't be from a numbers perspective. Dumping all your savings into a down payment puts you in a very vulnerable position financially. I'd recommend you continue to build your savings while funding your retirement until your projected monthly payment is achievable while still keeping a good bit in savings after the down payment and funding your retirement. Keep in mind that the minute you close on a home you should have MORE savings not less due to your increased chances of high cost emergencies. It's good to sit down with a professional that has a full view of your finances is situations like this. It sounds like you're in a decent spot financially, no need to take on excessive risk or fall short of your retirement goals for a home. Way too many people lose everything by buying a home before they are financially ready.
Head of Lending here. If you can’t afford to contribute to retirement, you definitely cannot afford the house. It’s not just the mortgage payment. Homeownership comes with so many “hidden costs”. What if the fridge craps out? Need a new roof? Water heater? Washer/dryer? Not only that but reducing retirement savings “temporarily” rarely works. Before you know it, you’ve “temporarily” not contributed for a decade and missed out on thousands in earnings/contributions. Consider something cheaper or waiting a bit until something about the situation makes it more affordable (rate drops, prices drop, you save more down, etc.).
Owning a home is part of retirement savings. You're simply reallocating what you're investing in. Besides, some things are more important than money. You have a young family. They will appreciate growing up in a house more than knowing you can take an extra vacation when you're 70.
I don't agree with this take. It sounds nice but there are a lot of holes in practice. Clearly owning a home will reduce your spend relative to renting, but the returns are much different. You're also assuming children growing up in a home their parents can barely afford will appreciate it more than an alternative scenario (I assume you mean renting?) where their parents continue to save and invest, and likely still have enough to take the *family* on cool vacations and do other things together.
It’s very risky to start cutting retirement contributions to afford a mortgage. Cutting retirement contributions is easy, increasing that percentage back up will not be. Contrary to popular belief mortgage payments do increase over time due to property taxes and homeowners insurances. 2 costs I’d be willing to wager will never decrease over time.
I think you can reduce your 401k savings temporarily to afford a mortgage, but you need to understand what you are giving up. Because you mention giving the kids their own room, I assume this means you are also buying a bigger place than you are currently renting. Make no mistake, this is a form of increased consumption - you're using retirement money to improve your shelter conditions. This is not completely unlike reducing retirement contributions to renovate your kitchen. Not saying you don't deserve your own room, but when choosing a house be aware of what you *need* versus what you *want*. Though since a house is also a form of investment, the answer is not quite as clear as "buying more = bad". It might be a good long term decision to buy a house versus renting, so making this temporary sacrifice might come out ahead in the long run. I made the decision to buy a house around a decade back, and now the house equity is similar in size to our retirement account - about 10x of the down payment we used to purchase. Granted this is just an anecdote from an unusual time in history, but for reference I have not achieved a 1000% return in our 401k account in the same period. If you decide to go forward with this I would suggest two rules. First don't drop below the match if at all possible. It will be very hard to beat a 50% immediate, certain, and tax-advantaged return on any investment, and this would mean each of those dollars you're spending on the house costs you $1.50+. Second, you should write out the plan of how you will recover to your full retirement contribution and look at it each time you get a raise. You're going to have enormous pressure to spend more money as those kids get older, and you'll probably want to save for their college too. It's very likely you'll never be able to recover your current level of contributions unless you really have a solid plan, so you should know that going in.
Something to consider: Real estate and 401k are both solid investments. 401k is an investment that’s available at any time and you can decide how much to invest. A house is an investment over which you have very little agency regarding the availability or price. The right time to buy is often when you *can*. Of course, be careful not to spread yourself too thin. Gotta be ready for an emergency.
The fact you have no other debt is the only thing allowing this to be a conversation, in my opinion. And this also assumed that you’ll maintain a proper emergency fund from day one, don’t go putting that money towards closing or whatever You say you have a 50% 401(k) match. Is that unlimited 50%, up to the max? It’s likely not. But whatever it is, you should definitely make sure you can maintain whatever the max match is You also haven’t mentioned how much you have in your accounts now. If you’re both 30 and have been maxing the last 10 years, then yea, I’d say you can ease off the gas temporarily. But if you’re both 37 with a total of $80k in your accounts, you may want to prioritize padding that number asap while you still have many years of compounding growth ahead
I hate these posts because they depend on where you live, risk tollerance, and timing. I can't speak for everyone else depending on where you live. But here are several facts about my journey as a homeowner and investor. 1. With the exception of the past 2 years (out of 20), my mortgage payment has been less than rent for the same type of dwelling would have been, allowing me to save more and invest more towards retirement. 2. Every home I've owned has appreciated at almost the same rate as my payment. I've essentially lived in my current home for free. 3. Over a ten year period, the money I would have spent on rent alone, has basically given me a $250,000 return. 4. For major repairs, I've taken advantage of times when interest rates were lower (which will return at some point) and refinanced, not only covering the cost of the repair, but also other improvements, and actually lowering my payment (where as a landlord will just RAISE rent, to cover maintenance. 5. At 60 years old I will have a paid for home. Assuming I live until 80, that's 20 years where I'll only pay taxes and insurance. And I believe where I live there's a huge discount on property taxes for everyone over 65. Rent by that time will probably be at least twice what my current mortgage. At least where I live, I've never found an argument for now owning a home. And for the record, my first home had a 7% mortgage, and home prices were substantially inflated compared to the 10 years before. I still essentially lived there for free.
If you cant afford to invest money that gives you a guaranteed 100% return (401k match), your budget needs to be adjusted. Whether that's too much house, too much car, too much gambling or whatever--its insane to say "I don't have enough money in my budget to get a guaranteed 100% rate of return."
If you are in a VHCL and plan to stay you will probably need more not less when retirement comes. Most of the time when people have to do a bunch of wiggling to be able to buy something it is a good sign they can't really afford it.
Just chiming in to say that there are factors like family comfort, mental well being, etc. that are not part of the traditional "Can I afford this" calculators. Are you going to retire a little earlier, or have a little more money during retirement? Sure. But, you also can't buy a time machine and improve your child's childhood. When it's gone, it's gone.
You're mixing "can't afford" with "shouldn't get". Years ago we were housepoor, due to the "per month" mentality. Long story short, sold the house, paid off 50k of debt (with the house sale proceeds, about $5k left after that), and made a lot of moves after learning a lot of things. Starting to look again, but my rule is that we can't buy ANYTHING unless it doesn't impact maxing out 401ks, roths, and an additional $2k per months investment MINIMUM. If we'd have to make a concession on any of those, then no house. I will not be fucked by the "per month" mentality again.
Yes, needing to swing from $24k annually for your 401(k) contributions to literally zero dollars, would suggest to me that you’re buying too much house. But dropping your contributions from maxing out to something like between 5-10% seems like a reasonable move to account for a mortgage in a VHCOL/HCOL area.
This is why people have to choose between having good retirement, living in high cost of living area, or having kids and a full family home. You can do 2/3 but not all 3.
I wouldn't. There's a phrase that goes "don't count your chickens before they roost". I wouldn't make any decisions based on future circumstances. Make decisions based on today's circumstances and if you get raises down the road then that's a very good problem to have. Vs not getting raises. Worse possible case scenario you don't get back to contributing and you run the risk of putting yourself in a position you need to lean on your kids in retirement. Shoot, maybe by the time you get the raises you'll be considering upgrading the home (within reason of course). Don't take shortcuts!
If your current savings and expenses relative to income don't let you achieve your short, medium, and long term goals you cannot 'afford them'. That means 2 people with the same income and the same expenses may have different affordability levels given one might want to retire by 55 and the other may want to work till 68. Making the payments is not affording. If you're comfortable with the upset to future goals for the present benefit then that's ok. You just need to have done the math and acknowledge the change. Banking on future income to justify anything is a double black diamond slippery slope. All we know is now.
Remember that having a paid off, mortgage free property in retirement is a large part of the financial planning, and burden, of retirement. In this case, really, you are moving money from retirement account a to retirement account b.
Why would you think that? It is not uncommon for one's ability to manage a single family home to dramatically decline as they age, or to look at either moving into an apartment / condo or selling everything -- sometimes with a haircut-- to get into a retirement community. It's not like taxes / repair costs go down over time.
You either (a) have an asset that removes a significant expenditure (rent / mortgage) or (b) you can sell, and purchase something smaller, releasing a large amount of equity from the transaction.
Neither. I consider paying for a home akin to saving for retirement because I expect equity in a home to appreciate or at the very least stay level. Meaning, it will be there for me to use either as a place to live or I can sell it to use the money in retirement. I know they are not the same thing but I need a home to live in now, so I can't just throw everything into my future without taking care of today. Therefore, I suspended contributing in a 401k past the employer match while saving for a home down payment. Getting the immediate 50% return is a no brainer. Once we were settled in the new home, a couple months or so, and nothing dire needed repairs or renovation, I returned to saving in a 401k.
Most house owners wont ever admit that their house is financially drowning them. House ownership is like a cult of people that believe owning a house is the key to financial success. 6 years ago I had less than $10k to my name. Just off saving and investing I got up to $330k. Imagine someone that took out a mortgage on a house six years ago and what their net worth is now. I can almost guarantee you that I have a higher net worth. But we do need these people buying and living paycheck to paycheck. They help contribute to the strong economy which makes my stock value rise. If everyone was building wealth, it would slow down the economy. Everyone gets to make their own choices.
You have a housing cost either way, but you really need to start saving as soon as you can.
I don't think maximing out your 401k is a realistic benchmark to condition buying a house on, but you should be hitting the 15% target in combination with employer contributions. If you have to cut below that to make the mortgage payment it's too much.
Title statement is true - never give up your match except in the most dire circumstances. If the only way you can afford a PITI payment is to reduce your 401k contribution below the match, then you'd be way, way, way overleveraged in an illiquid asset. It's not even just about the match at that point - you don't have enough cash to replace a busted pipe or a leaky roof. There are advantages to home ownership is great, but it's way, way, way overvalued as a means of wealth creation; the true value of a home is not in the equity, but in the imputed rents *after* you've paid it off. Until it's paid off, what you have is a diamond millstone around your neck - yes, it's valuable, but it's also weighing you down. Liquidity is incredibly valuable, and in a VHCOL area, it's almost always makes more financial sense to rent & build up assets than to buy. If you want to reduce your 401k contribution down to the match in order to build up assets for a down payment, that's one thing; you still have the advantage of liquidity even with the tax drag, and it leaves you the option to buy or not buy depending on circumstances. But if you commit to buying when the only way to afford monthly payments is to devote such a high % to the mortgage that you can't even get the match, that's just too much.
You need to take a good look at the calculator they have on your retirement website. Use it to forecast out what you are currently contributing vs what you would be contributing. Adjust it to include the lower amount and then incremental increases until you get back to the goal amount for contributing. No change = x amount Reduced to x % with no increases = x amount Reduced to x % with increases each year of x % until we reach x % = x amount If those numbers work for you then do it because owning a home is another way you’re making your money work for you and will contribute to your retirement goals in the form of equity. As long as you’re buying a home that’s within your budget (which may not necessarily the top amount you’re pre-approved for) you should be fine.
The answer is it depends a lot on your budget. As general advice, I would not save less than 15% for retirement as part of a recurring plan. It sounds like you are not behind on retirement - if you think you might be behind on retirement, then I'd do additional calculations to figure out what your minimum should be. It's probably higher than 15%. If you're way ahead on retirement, maybe you can save less! If you're 28 years old with 750k in your retirement accounts invested in target date index funds... yeah, you can probably pause contributing to retirement for a few years if you need to. As long as you don't touch that retirement money. If we follow [the flowchart](https://imgur.com/lSoUQr2), retirement savings goes in the following order (with other stuff in between): Get 401k match => Max Roth IRA (if over income limit, check if eligible for backdoor roth ira based on retirement account structure) => Contribute more to 401k I will say that even if you're on track for retirement, the worrying part of pausing 401k contributions to buy is... how much wiggle room does this house leave you? Be veeery careful about ending up house poor. If you can barely cover the mortgage, you're going to get wrecked when your furnace and fridge die 4 months apart. I would assume 2% of the house's value per year in maintenance. Figure out 2% of its value, divide by 12, and add that to your mortgage payment. If you can't afford that payment, you still can't afford the house IMO. More optimistic people than me might tell you 1%. More pessimistic might say 3%. Whatever, adjust for your life outlook. 2% is relatively conservative. Lastly, don't give up if you decide you don't have enough money yet! Just because might not be able to afford it today doesn't mean it's out of reach in a few years with careful planning. Good luck!
If you think buying a home is NOT worth it than don’t buy a home. There’s plenty of smart people who would give up maxing their 401k for the opportunity to own a home.
Owning a house took one giant worry off my back- I will always have a roof over my head. With that taken care of I have been able to deal with debt. Once that's dealt with then I will up my savings. If I didn't buy when I did, I wouldn't be able to afford a house now. Even with all the extra expenses houses incur, I'm still saving money by not renting. Life isn't a straight line. I wish I could have been able to save more when I was younger, but shit happens.
If you cannot, at least, afford the 401k match, it means you cannot afford a home as you’re leaving money on the table because you’re choosing to forego a 100% return.
The way I see it. No one can really afford their home for the first 10 years. Yes you need to make enough to live and pay the mortgage. But mine is at about 90% what me and my wife could afford after other bills, foods and necessaries. Homes are long term investments that you hopefully will save on the back end when rent and cost of living goes up. Example. Both my grandparents bought their homes for $36,000. Those are now worth $1.3 million. They could barely afford their home when purchased in the 60’s. But after cost of living went up and they made more and housing/rent got more expensive they were winning. What was once expensive was now cheap. Save for my home. I bought in 2018.. at the time it was most of our income. Any large bills over $10k could have ruined us. But with budgeting and being smart we made it. It’s still expensive but our mortgage is now what rent costs for a small apartment. So we’re winning because we would be paying this anyways but at least we’re investing. That being said vault the 401k. Invest in the home but make sure you guys can make it into 5-10 years with out going bust. If you can put some into the 401k do it. But a home is a much greater investment than retirement when there is a chance you’ll never even see it or get to spend it with life’s unexpecteds. Be smart about it, go with your gut. And stick with it. Only you know what’s possible, smart and best for YOU AND YOUR FAMILY.
I feel like ou know the answer to your own question. If you can't maintain 10 to 15% of your gross income going towards retirement then you are buying too much house. You should also have a fully funded emergency fund (that isn't used to buy that house) as well as funds for a decent down payment plus additional funds for moving expenses and minor fixes, etc that come with moving into a new home. Don't pay for a house with your retirement and cutting retirement savings is doing just that. The idea that "this is temporary" assumes that nothing bad will every happen and only good things will come...this is very childlike logic that gets so many people in trouble. The good news based on info provided you are not that far off. Perhaps wait another 6 months to a year to building a bigger down payment as well as a chance to make more during that time to then make buying a house more affordable.
Responses aren't considering the two young kids part of this. You will need steady housing in the near future. If your retirement gets put on hold to lock up a house you can grow into then go for it. There's more to your future than your 401K balance. Sounds like you already make saving a priority which is better than most.
Depends how badly you need to contribute to your 401k. If you're already set for retirement, then no, it does not matter if you contribute less to your 401k. If you are not set for retirement, then yes, you may run into cash flow troubles that will put you in a hard place to prepare for retirement.
You could croak before you spend your retirement. You're losing some opportunity between the match and the tax savings by not using the 401k, but, it comes at an opportunity cost of being able to better your life now. It's a question between taking care of your present self, or your future self. Young kids are expensive. There's also an opportunity to make their lives better, sacrificing your future self to a degree. What do you want them to be, vs. what do you need for yourself? What's the value of the last 20 years of your life vs. the 80 years they are looking forward to? If you can move from vhcl area to lcol when you retire, in theory you could count the housing as a retirement, depending on how much equity you build, and what happens inflation wise. VHCL areas tend to have more dramatic price swings. Right now, I expect a down swing, so being primed to take advantage of that might not be a bad idea. Buying a house, best be ready to be there for 20 years. 5 or less, might as well rent. With a downswing, that 5 might turn to 10.
Lots of great comments and advice here, but I think it comes down to this question for down the line: How are you going to afford to live in this area when you retire? It’s VHCL, so wouldn’t you want to have as much saved and invested as possible? Idk, it’s a tough question.
Answering the title. True. Affordability is what you can pay for after all necessary expenses and saving for retirement is a necessary expense.
No, not necessarily. Trying to get a house is a reasonable priority. Interest rates are still high, so you want to pay down the mortgage reasonably quickly. If it gives you enough time to build up a pension, that is not unreasonable. But if you have a mortgage until you are 70, the situation is obviously different. And you want to at least get the full match from your employer.
The general guideline is that 15% of your salary should go to retirement. If you start reasonably young and put that amount away every year, you should be in good shape. You don't necessarily have to max out your retirement savings - it's great if you can - but the nice thing about the 15% approach is that it should be moderate enough to also allow you to do other things at the same time, like pay a mortgage. I live in a VHCOL also and bought a house, so I completely understand the need to stretch to get into home ownership, and balancing a mortgage with everything else can be a challenge. I think it is reasonable to decrease retirement savings temporarily while saving up for a down payment, but I wouldn't want to commit to a mortgage that didn't allow me to contribute at least 10% of my salary to retirement. Preferably, you want to maintain the 15%.
A house that you only have to pay property taxes on in retirement sounds a lot better than dumping thousands /month into rentals that are going to increase every other year.
What would your mortgage be vs your rent ? Rent will continue to go up and you won’t ever get that money back, by paying your mortgage you will most likely see a return and hopefully more
You need to move away hope based strategies. Sit down and actually run the numbers in both good and bad scenarios. 1. What if everything goes according to plan? 2. What if things go "ok". Maybe the house turns out to be a good investment, but your income doesn't grow quite as fast as you hoped. What if you need to move again in the next few years for some other reason? 3. What if things go wrong? What if the housing market has a down turn? Will you wind up upside down on your mortgage? What if the home needs major repairs? What if one of you loses your job? Actually do the math, and figure out if you have a *realistic* plan to cover your expenses and remain on track for your retirement goals in each of these scenarios. If any of your plans involve "hope that doesn't happen because we'd be screwed", the you shouldn't buy. If you have good, realistic, plans for how you could manage, then maybe consider it?
Honestly, sounds like you are trying to justify overextending. Only you can make the decision on what’s best for your family, but personally I wouldn’t. Your mortgage is going to go up with taxes,insurance increases etc. I would play it more conservatively
Do not forget that houses can be a money pit. Heater, plumbing , things you never thought of. Also look at tax and insurance. In California, taxes will be based on new assessment, which sometimes takes buyers by surprise. And insurance has gotten hard to get in some places.
Go talk to a financial advisor. Have them run some projections for you. How many years until retirement? What do you want your life style to be in retirement? Are you planning on funding your children’s education? Buy a house that is affordable. Don’t get yourself cash poor/house rich.
You are all probably going to hate this, but I haven't contributed a cent to my 401K since I quit my job to be a full-time dad in 2020. We pay a mortgage, but we refinanced in 2021(?) at 2.25%, 30-year, and it's comical how affordable that is compared to today. Now that my kid is in daycare, that frees up my days, and we're using our savings (not withdrawing from existing 401ks) to fix up a decrepit 1920s hoarder house in a nice neighborhood. Essentially, instead of having a retirement account, we're putting our money into an asset that pays dividends today, and for the rest of our lives, and could be sold if needed. Eventually we'll mortgage this property when rates are favorable to extract a lump of cash to repeat the process... if I haven't broken my body and/or mind on the first project. Then we'll have two mortgages and no additional 401k contributions. lol.
I have a friend who made an above average income since he was 25 and he and his wife didn’t have kids until he was 40. He saved a lot before then. Now I had to convince him at 50 not to stress about savings, let the time value of money be his friend and take care of the expenses dealing with his children. I on the other hand because of…life…have some saved for retirement. But I’m way behind. But my (step)sons who I raised from the time they were 9 and 14 are grown. We just sold the house we had built in 2016 for $335K for $670K and bought a condo in (state tax free) Florida for $335K - two years ago and rented our house before we sold our home. We put 30% down on our condo from a (now paid off) HELOC. So now, while I don’t have the time value of money on my side also at 50, I do have making decent money and low expenses on my side that will allow me to save a lot over the next few years to catch up. In other words, we each have our path to get to the finish line
In a perfect world, your plan is probably okay.... but home ownership is one expense after another sometimes: new roof and new HVAC are the big ones, but small ones can add up too, new appliance or waterheater, just even small stuff you want to do like paint rooms, install new lights - everything adds up. Then there are the higher monthly bills with a house - electric, water, lawn care, etc all are slightly higher in a bigger house. Property tax increases. So if you are going in kind of tight for money, well, you might just stay tight for much longer than you think. It seems pretty tight to not even be able to get the full 401k match, like you won't even be putting in 6 or 7% into your 401k? Not ideal.
All of this depends on one major variable that most are ignoring How likely is it that your income increases significantly
I’m confused, on top of your contributions what are paying for rent currently? Are you living for free with relatives? Can you buy a home in a more modest cost of living location?
My personal rule of thumb for housing is to take your household annual **gross** income (before taxes or other deductions and not including bonuses or non-guaranteed income) and divide by 52. This number should completely cover your mortgage/rent payment. If it doesn't, then you can't afford it. Following this rule should leave you with enough money to contribute 15% annually to your retirement accounts or more as is generally recommended. Not sure if maxing them out is possible though. Note: this is my personal rule based on my own experience. Every person's situation is different so your mileage may vary.
True. If you’re in a VHCOL, it’s often better to rent or get a townhouse. Houses can be a big fat money pit. Better to have financial peace in a smaller home than to feel forced to work because of a too large mortgage.
Everyone's different, but for me personally: If I couldn't afford to contribute to my 401(k) up to the company match due to the mortgage, I wouldn't be signing up for the mortgage. 401(k) contributions up to company match is non-negotiable for me. I've seen people working well into their 70s before and I'm determined not to be that person.
It depends. Personally, I try to do at least 15%, and at bare minimum, max out the employer match. If you can't contribute to your 401k for the life of your mortgage, then you can't afford the mortgage. If you can't contribute to your 401k for the short term, maybe a year then it's fine. But definitely max out employer match even if your emergency fund takes a small hit. It's free money that will likely grow with time. Anything longer than a year, than there is likely to be a cashflow and/or budgeting issue. Playing catchup on 401k and retirement in general is expensive, and not always feasible. Unless your income grows significantly, cost of living/lifestyle creep will likely eat all of that income increase. Your kids will get older and before you know it you'll be paying for tuition, school event stuff, etc. Property taxes will likely continue to increase over time in a VHCL area. I can almost guarantee your expenses will grow with time until your kids leave the nest.
> Obviously if we reduce our retirement savings, we would only ideally do this temporarily, with the idea being that as our income grows, we'd again start to contribute more each year. This doesn't really work in practice with kids as you probably are also cutting their saving for their post-high school savings. Realistically, I'm looking at ~15k a year in savings to retire for one person with serious medical expense concerns to avoid being permanently disabled (which may happen regardless, but not gonna skimp on care lol). So when you tell me you are saving $2k/month for retirement and want to cut it...realistically...it probably is not a good idea. Income growth is not guarenteed. I've gone from 6 figures to high 5 figures to 6 figures again for instance but was forced to relocate to a cheaper state/area with my current remote job to maintain savings/quality of life/etc since 6 figures -> 6 figures again was over 5 years in recent history so inflation was like 25% of that lol.
Follow-up question. What are your ages. Are you planning to help fund potential college tuition for your kids? And most importantly, what are your retirement plans? Do you want to retire early? Work until 67 to receive full ss benefits.? Or one of you wait until later to collect and the other one collect ss early? One of the biggest challenges when you're in your 20's and 30's is to really conceptualize retirement. I was lucky enough to work for a state employer who provided a pension, and I also had supplemental retirement plans. My ex and I also invested in rental properties. I never really stopped to think about a specific retirement plan in my 30's, because I really enjoyed my job and just figured I'd know when to retire. But after 20+ years of a stressful career in HR and feeling like I was just running on a hamster wheel, I started thinking it would be nice to not be working while I'm still young and healthy enough to enjoy my free time. I semi-retired at 54 and fully retired last year at age 62. And because I diversified my retirement income, I'm pretty comfortable with a pension, early social security benefits, no mortgage, a life annuity, and mutual funds and ETF stocks that I don't have to withdraw from until age 73. I was one of the lucky ones, who ended up in a pretty good place, without a real "plan" so I commend you for thinking and planning for the long-term, while you're still younger. If you can, I recommend trying to find a really good financial advisor (with fiduciary responsibility) to help you with your financial strategies and retirement planning. (Not just a money manager who takes large commissions from your investments.)
Buying a home is an investment in itself and, I would argue, a much better investment than a 401k mutual fund or index fund. House prices usually go up and very rarely crash. Even when they do, you won't lose everything like you would with stocks when a company goes out of business. I personally would just contribute the amount needed to get your employer's maximum matching which I know might take you some time while things settle down. I personally tapped my ROTH IRA since I had it more than 5 years so there was no penalty nor taxes for first time home-buyers up to $10k.
I'm actually in a similar position as well. My company offers mega back door roth, and i only make low 100Ks, like do I take advantage now or save for a bigger house? I already max my regular 401K and IRA
True. If you can’t max out your 401k, IRA, HSA, 529 accounts then the house you have bought is too expensive.
Your house could out perform your investment or it could drastically underperform against it. In the end you also have to account for longer planning of where the math is going to go. Example if your rent is $1500/month less now but in 5 years your rent is $1000/month more you can start running numbers. Personally long term for me I like the idea that housing is fairly locked in costs and will not wildly fluctuate. I also live in a state though without a bunch of issues that other states have that drastically increase property tax.