My wife and I have started to make plans for the upcoming move. We are still nine to ten months away from moving to the new city, but I want to be well prepared for the move. Hopefully this will be the last big move that we have to make and I want to make it as smooth as possible. Not only have I started researching moving costs, but I’ve also been looking into the cost of a condo in and around the new city.
My wife and I hate the idea of renting forever and we want to buy a place of our own. Originally, we thought that buying a place of our own would be more affordable in the new city, but we soon realized differently. Because we want to live close enough to downtown, it’s going to cost us a pretty penny.
While my wife and I recently started earning a little extra income, we’re far away from having enough for a 20% down payment. Since I want to buy our own place sooner rather than later, this means one thing: operation save down payment. Over the next 1-3 years, my wife and I will save all of our extra money so that we can buy a place of our own. We already make enough that we can afford the mortgage payment that it would be (with the down payment lowering the amount we would borrow), it’s just a matter of finding the money for the down payment.
How We Are Currently Using Our Extra Money
As I mentioned a couple months ago, my wife and I are directing almost all of our extra money towards retirement. We max out both of our Roth IRAs in addition to contributing a fairly aggressive amount to our 403(b) accounts. We know that this is important for us to set ourselves up for a bright future. We don’t want to be those who fail to save enough money for retirement.
Yet, with the new desire to save up a down payment, it leads me question which is better: Put all of our extra money towards a down payment so that we can buy a home 1-2 years sooner, OR continue to max out our Roth IRAs and delay our home purchase a few more years.
Is it Better to Invest for Retirement or Save for a Down Payment
Ultimately the question that I am asking is it better for young adults to save a down payment for a house or to invest for retirement. Which of the two should be the priority for young adults? While I understand that there are more than financial reasons for wanting to buy a home, I want to see which option is better according to the numbers. Before we jump to the calculations, let’s list the benefits of each option.
Advantages of Buying a Home Earlier
- 1-2 years of savings in rent – Since we are going to buy a home eventually, we’re going to pay off the mortgage for 30 years, regardless of when we buy. The earlier we buy, the earlier we stop paying rent.
- Lower Price – Assuming that the real estate market is back on the rise, which it seems that it is, buying a condo now could save us $10,000-20,000 depending on the rate of inflation. According to some research, home prices are expected to increase 3-5% in the area where we want to buy over the next year (but who knows how accurate those predictions are).
- Lower Interest Rate – Interest rates are at or near an all-time low right now. With the economy showing signs of recovering, it’s safe to assume that interest rates will rise over the next few years. No one knows if or how much interest rates will change, but even half of a percentage can make a huge difference.
Advantages of Maxing Out Roth IRAs & Delaying Home Purchase
- More Money for Retirement – Contributing to our Roth IRAs is something that we can only do this year. In other words, we can’t go back in time to contribute to our IRA’s since there is an annual contribution limit. In addition to this, saving money this early, with at least 30 years until retirement that $11,000 per year will grow to a sizable amount.
- More Financial Security – Another benefit of delaying our home purchase is that we will have a larger financial cushion to protect us from the worst case scenario.
Two Choices – Which One is Better?
As I have framed the dilemma, there are two main options. The first would be to continue our current commitment to saving for retirement by maxing out our Roth IRA and save any extra money towards the down payment. Following this path, I estimate it would take us 2-3 years from now to have enough money to buy a home. This seems like an eternity when I think about the idea of continuing to rent for this much longer, but it also means that our retirement accounts will be that much larger.
The alternative would be to cut all other savings down to the bare bones. Contribute in Mrs. 20’s 403(b) account up to the employer match and then put all of our savings toward a down payment for our home. This would expedite our savings and significantly reduce the time we have to wait to get into our own home.
For practical purposes, let’s assume that it shortened the waiting period by two years. Since my wife and I are currently paying approximately $16,000 per year in rent, buying a house sooner would save us approximately $32,000. In addition to this, a 5% increase in house prices over the two years would mean an increase of approximately $15,000. If there is an increase of .5% in the interest rate (4% to 4.5%), that would mean an additional cost of $17,000 in interest over the course of the 30 year loan. Here’s a look at the possible additional cost of waiting to buy a home:
- Rent: $32,000
- Inflation: $15,000
- Interest: $17,000
- Total: $64,000
Looking at how much we could save by buying a house right when we move sounds like a great plan until you consider what we are giving up. By sacrificing almost all of our retirement savings for 2 years, we would have approximately $22,000 less growing with compound interest for 29 years. In other words, we would have approximately $160,000 less 30 years from now (when we are close to retiring; assuming a 7% annual rate). Since this money would go into our Roth IRAs, it also means that we couldn’t play catch up like we could with paying off our future mortgage early. On top of having more retirement savings 30 years from now as a result of not sacrificing our retirement contributions, we would also have more money in our retirement funds at the time of buying our home to serve as a financial cushion.
When I compare the two options, I can easily see that sacrificing two years of retirement savings to save up a down payment faster is not the best option. If it comes down to sacrificing one year’s worth of Roth IRA contributions, I may be willing to do that, but only with the commitment that we would increase our 403(b) contributions after moving into the home. I’m not excited about renting for another couple years, but I don’t want to sacrifice financial security for the rest of my life only for the sake of buying a home 1-2 years earlier. After all, sometimes the best things in life are worth waiting for.
Readers, am I missing something in my cost comparison? Would you make a different decision?