Should I invest in a home or retirement?

Buying your first home and retiring from your career involves an abundance of planning, budgeting and saving money. Depending on where you are with your life, one could appear far more urgent than the other.

Saving for both a house and your retirement at the same time is a totally viable option, it may require more careful financial planning than if you picked only one, but you can put money into both over time. If you are young, saving a relatively large chunk for retirement should be the first priority, if you choose one over the other.

Tip: Additional savings or discretionary funds could be invested in the stock market, and with the help of an investment advisor that money could get a larger return while you work towards a house fund.

Tip: Some young people choose to pause their retirement savings to save for a house. But on a 401(k), you want to at least contribute enough to get the employer match if you have one.

What if I choose to invest in a down payment?

The biggest difference between retirement savings investments and buying a home is that the money you invest in a home goes into material goods, which you may not see a return on for many, many years — or not at all. But, you’ll also be building equity and strengthening your credit score by making your mortgage payments on time.


Let’s say Anne saves $6,000 a year for five years before turning 25. For the simplicity of this example, Anne tucked the money under her mattress and didn’t earn any interest during that time. Anne has $30,000 to use as a 20% down payment on a $150,000 home or invest in a retirement account that will earn an average of 7% annual returns over the next several decades.

If Anne Makes a Down Payment

Anne’s first home turns out to be ample for her needs, and she stays in her home for 25 years. According to Forbes, the average increase in real estate prices between 1980 and 2004 was 274%. Using this figure, Anne’s home would be worth $370,500 and the $30,000 she “invested” as her down payment would now be worth $74,100. (Obviously, she would have been making mortgage payments, building equity, and would make more of a profit on her home).

If Anne Saves for Retirement

Anne decides to pull the $30,000 out from under her mattress and invest. She works with an investment advisor to build a well-diversified portfolio and, together, they adjust it at least every year. (Although Anne continues to put money into her 401(k), she put this money into its own account and makes no more contributions). Her conservative but intelligent investing yields an average 7% annual return over 25 years meaning her $30,000 is now worth $162,823.

Do I Need 20%?

If you have been saving for retirement for a few years, have few other debts, and have a responsible concept of how much home you can afford, placing less than 20% down on your home shouldn’t be much of a dilemma.

You’ll need to pay private mortgage insurance (PMI) for as long as you have less than 20% equity in your home, but over the long-run the gains your retirement account is making will make up for the money spent on PMI.

Using an IRA for Your Down Payment

It is worth mentioning that the IRS allows you to withdraw up to $10,000 from an IRA for a home purchase without paying the standard 10% early-withdrawal penalty. There are some rules:

  • the IRS treats a withdrawal from a traditional IRA as income and you must pay taxes.
  • Withdrawals from a Roth IRA for a home purchase are both tax- and penalty-free as long as the Roth is at least five years old.

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