Should You Save for Retirement or a Home?

Saving for retirement and a home at the same time is very possible. However, this requires you to plan and budget carefully. If you wish to achieve these financial goals simultaneously, then here is what you need to know:

Impact on Your Budget

If you’re trying to attain several big financial goals, such as saving for retirement and purchasing a house, you first need to create a budget and stick with it. The budget will make it easier for you to monitor your cash flow while helping you work toward achieving financial stability in the long term.

By applying the 50/30/20 rule in your budget, you can be able to pay off your debts while saving for retirement. This rule involves dividing your net income into 3 categories: fifty percent for needs, thirty percent for wants, and twenty percent for savings.

If you wish to acquire a home, it is recommended that you reduce your debt in order to obtain a loan at a reasonable rate. Also, aim to maintain your debt-to-credit ratio below 35%. Low debt-to-ratios allow individuals to live a quality life after retirement.

Having a high debt-to-credit ratio in your retirement days means you will have to utilize your retirement funds to pay off high-interest debts. So, you are likely to have less money to do things that are important to you, such as traveling.

That said, meeting your debt obligations before retirement helps you build financial security in the long term.

Impact on Cash Flow

Purchasing a house can have both long- and short-term impacts on your cash flow. Let’s look at the short-term impacts first.

Short-Term Impacts

Using your savings to make a down payment could make you house poor. That’s because you won’t access cash using your home until you have built equity in it. Most lenders require borrowers to have a minimum of 20% equity in their house to consider them for a home equity line of credit or home equity loan.

Therefore, owning a house without sufficient retirement savings can be risky since you won’t have access to money. For instance, if you want to handle an emergency related to your property, you will have to take out a quick loan.

Moreover, home maintenance is expensive, so if you do not have enough funds to make the necessary repairs, your house could lose its value over time.

Long-Term Impacts

Handling expenses related to homeownership after retirement can be challenging, especially if you depend only on Social Security. A report by the National Institute of Retirement Security shows that 40% of retirees survive on Social Security payments, which are usually not adequate to cover necessities like medicine and food.

Certified financial planner William Bevins advises people to prioritize retirement savings to live a quality life after they retire.

How to Balance Housing and Retirement Goals

As mentioned earlier, saving for a house and retirement at the same time is possible. Here is how to do it:

Establish the Exact Amount to Save

Most first-time home buyers in the United States finance their purchases using mortgages. To obtain this type of loan, you need to demonstrate your ability to make a down payment of at least 20% of the house value. So, it is your duty to determine the price of your dream house and then start saving for a down payment.

Once you get the house and build equity in it, you’ll likely have access to cash after retiring.

Establish Timelines

Establishing a timeline for your financial goals is vital. By determining when you hope to attain your goals, you’re able to see the bigger picture, which allows you to stick with your current budget.

Automate Your Savings

If you deposit funds manually to your savings account, you could be tempted to skip making a payment in a certain month. That’s why automating payments to your savings account where possible is advisable.