Hello! I am 29, and hoping to buy a house in a year or so, if possible. I take saving for retirement pretty seriously, as I have a chronic illness and want to make sure I can take care of my health needs when I'm older. However…I also really would like the security of a house. I feel like I can't truly relax with my rental because any year the owner could sell or rent could go up too much; hasn't happened yet, but I'd like to move before that happens.
So, I've been eyeing my retirement contributions. I currently contribute 15% of my paycheck to my 401k for a total of $17k/year (including employer match). If I decreased that to 6%, the minimum to still retain my full employer match, I'd be down to contributing $7k to the 401k for a year and raise an extra $8k for the house (accounting for taxes, HYSA interest, etc). This would be some really nice wiggle-room for things like closing and moving costs alongside the down-payment.
How much will that $10k in 401k cost me, long term? Some online calculators are giving me somewhere in the ballpark of $100k difference–does that sound possible? It feels like so much money to me now, but I'm not sure if I'm just splitting hairs in the grand scheme of things. Would I be better off trying to just shave an extra couple hundred dollars a month off my budget (hard, not impossible, but only an extra $4k or so for the down-payment)?
More numbers for context below:
- Salary: $105k
- Current e-fund: $20k
- Current house fund: $44k
- Expected house fund in a year (without changes): $75k
- Expected house fund in a year (with changes): $83k
- Current retirement fund: $150k
- Expected home price: $300-400k (sadly I want gardening space)
- Desired down-payment %: 20
- Family size: 1 (currently planning a roommate though, but don't want to rely on it)
- Not planning to have one ever unless I get into some kind of marry-your-friend situation or receive a family member's child in some tragic accident
Would lowering retirement contributions to buy a house set me back too much?
byu/-Knockabout inpersonalfinance
Posted by -Knockabout
3 Comments
A very rough estimate is that your contributions double in value every 10 years after inflation. So $10k would be $80k in 30 years.
It depends on numerous factors. If your annualized return is ‘r’, then after ‘t’ years return is $10k * (1+r)^t. This could easily be $100k, if number of years is long enough.
However, you also need to consider what the $10k is doing if not invested in a 401k. If it’s part of the downpayment for the house, then it could potentially have a higher return than the 401k, being a highly leveraged as part of a mortgage. As such it depends on rate of mortgage. It also depends on rent savings and numerous other factors. One should consider inflation as well.
Or more simply, if you need the $10k to buy the house, then reduce 401k contributions by $10k or other amount you need. If it turns out that you don’t need it, then you can invest more next year, so there is less potential compounding loss. If you aren’t contributing to Roth IRA, that is another option, as Roth contributions can be withdrawn at any time without penalty.
So it really depends on exactly how you do this. Here is what the math actually says. Not the idealized stock market curve. The actual math with market variability included.
In principal… 15% for ~30 years in a market tracking fund should in principal… be able to replace more or less your lifestyle provided you don’t get extremely large jumps in pay. Like going from 60K to 120K in a year can throw this off. But this doesn’t even account for social security. And you may need to contribute more if you want to up your lifestyle. As well when you get older, it’s not usually recommended to be that aggressive investing. So you may need to contribute more initially to compensate for a glide path at the end. Or be willing to contribute for more than 30 years. Your 29. If you paused for a year…. That would put you at ~60. More or less. But that’s a lot of room to adjust. Also.. this actually doesn’t mean that you can set 15% and go blind for 30 years. The actual path your investments will take will mean you will actually need to adjust this here and there. Making tweaks. So this isn’t a “hands off” process. I just mean that generally a 30~40 year window is usually a pretty safe window. If you need more because of your health concerns. Then you may need to push towards that 40 years. Or you may need to contribute more. Things like that. But also just keep in mind that what your saving for retirement really extends what SS will provide as a base. So 15% may provide a slight lifestyle uptick.
Second… the thing people mistake especially about the match. Is that over a short period, the match really isn’t that much in the grand scheme of things relative to your income. Typically pausing your contributions for up to 2 years is often completely recoverable. Even if you pause the match completely. As in you contribute 0% to your retirement for 2 years. Usually recoverable. The condition is.. that after you pause. You need to effectively direct some additional money back into your investments for a period of time. Now where the challenge comes in is if your 15% contribution already is close to the max allowed by law. You might not have room to “catch up”. You said you contribute 17K. So you have some catch up space. You can always throw some extra in ira’s or brokerage to ear mark for retirement and catch up. But the point is if you increase your contributions after the pause. You can catch up.
I get challenged on this all the time. But you can do the math yourself. The larges single year return for the S&P was something like 57%. Even if the stock market earns 57% and you missed out on that. You still have 150K that didn’t miss out. The only thing that missed out is your employer match (and your contribution). Which again… in the grand scheme of things. Is not a lot of money. It’s entirely possible that after 2 years. You can calculate an approximate contribution amount that would exceed the earnings missed for the 57% percent. And it’s usually doable. So if you can do it at one of the literal worst possible times to miss out. There’s pretty much no real scenario where this doesn’t work. But it’s all based on you being able to contribute more. If you cannot. Then pausing will cause you to “miss out”. But again… you also have a lot of time.
So really that’s two paths. Pause for the year. Do nothing. You likely have enough time to out save this. Or increase contributions and catch up.