You’re ready to make perhaps the biggest financial decision of your life: buying a home. It’s easy to think in the here and now—perhaps you’re on the cusp of getting married, or starting a family—and forget about the future. But the purchase you’re about to make shouldn’t come at the cost of perhaps the second biggest financial decision of your life.
Not enough people think about retirement, mainly because it’s decades away from where they’re at now. Planning for what happens in your later years will only get tougher the later you wait. If you begin planning for retirement now, you’ll thank yourself later.
Your home will impact your retirement. Some people plan for this—buying a larger home for their families now with the idea to use the equity from that property to provide needed funds later. That’s a good strategy. But don’t overdo it. Poor planning can come back to bite…30 or 40 years down the road.
Here are four things to consider when buying a home, in order to ensure that it doesn’t hurt your retirement goals in the long run.
01) Stay in Your Price Range
Some look at the equity argument as a method to justify buying a more exorbitant home now. “It will ultimately come back to help us,” they argue.
First, there’s the obvious risk that you’ll bite off more than you can chew, and ultimately end up in foreclosure because you can’t afford the mortgage payments. That’s a worst-case scenario, but the other option isn’t too hot either.
If you opt for a pricier home, that means you’ll be paying higher mortgage payments as well. Even if you stay up-to-date on your monthly payments, that will be money that could be put into other, more beneficial retirement options, such as an IRA or a 401(k). If you pay $50 less per month on your mortgage, that’s $600 per year that you could put toward retirement.
Along the same lines, check out our post on how to lower your monthly mortgage payments so you have more to put toward retirement!
02) Be Careful Using Retirement Funds to Buy A House
The down payment on your home will undoubtedly be the biggest and most painful on your wallet. Hopefully you’ve been saving up for that hit…because the last thing you want to do is to draw too much from your IRA, 401(k) or other retirement savings to cover those costs.
The most obvious reason why you shouldn’t rely on retirement savings to pay for a home is because that money, if left in the bank, would have paid exponential dividends if it had been left in the account for another three to four decades. You won’t be losing any money now, but the the theoretical loss is huge.
The less obvious reason to leave your savings alone? IRAs and 401(k)s require the owner to be at least 59.5 years old before they make a withdrawal…otherwise a 10 percent excise tax is applied. That is losing money now.
Sometimes you can’t help but borrow from your retirement savings. Just make sure to consider what you can afford, and don’t splurge for the bigger home if it just isn’t necessary.
03) Don’t Pay The Mortgage Off TOO Quickly
Nobody likes being in debt. We’re inherently uncomfortable knowing that we owe the bank $200,000-plus. Some are inclined to try to pay that off as quickly as possible…getting out of the theoretical “hole.”
Once again, as before, paying as little as possible on your mortgage now is a smart choice. Your credit won’t suffer if you take 30 years to pay off the mortgage but your retirement funds will suffer if you don’t add to them. Rather than pay more toward your mortgage, put those funds in a retirement fund of some sort.
Just consider what your interest rate is, compared to what sort of returns you’d be getting from using that money elsewhere, such as through investing. If investments will get you 7 percent—and your mortgage interest rate is only 4 percent—that’s clearly a better use for your cash than paying the mortgage off in advance.
04) Downsizing Too Late
If you’re one of the aforementioned people who is calculating the equity on their home as part of their retirement plan, great thinking! That said, make sure you don’t wait too long to move into the smaller home.
Even if you still have time left on that 30-year mortgage, there’s no reason to stay in the bigger home if you don’t have reason (i.e. your kids have moved out). Sell and escape the higher mortgage payments of the bigger home. The sooner you can downsize your home, the sooner you can downsize your payments.
Some people worry that their kids may move back home, after school or otherwise. If this is the case, make sure that you plan your budget accordingly.
It’s okay to be a little flustered right now; you’re about to make one huge financial decision that will have an enormous impact on another relevant piece of your financial life 30 years down the line. Take the time to speak with a mortgage lender or a financial advisor, and make sure that you’ve got a plan in place!