Saving for a Down Payment and Retirement: What to Know

Jade Akintola and Brandon Thomas Brown are balancing three competing financial priorities — preparing for the birth of their first child, saving up for a down payment on their first home and contributing to their retirement fund. Something, they decided, had to give, so in the short term, that thing was their retirement savings.

“At the moment, we are prioritizing investing and saving towards our property goal, and keeping cash on hand for our new family addition and time out of work,” while seeking the stability that owning can offer, Ms. Akintola said.

For the past six years, the couple, both self-employed, have been renting in Brooklyn. Now they are looking to buy, possibly there or in Los Angeles. Despite their combined six-figure salary, Ms. Akintola said it would take three to four years to save for a down payment on a house at the price they expect to pay, around $850,000.

“We work in those cities a lot, have a good community of friends and colleagues there, and have established networks,” said Ms. Akintola, 33, who is the founder of WONU, an marketing agency that focuses on live events, and ITA, an outdoor goods brand. Mr. Brown, 35, is a portrait photographer. The couple are also considering Atlanta, where their money would buy them more space, Ms. Akintola said.

The cost of owning has become so high in many areas of the country that it is especially hard for first-time home buyers, who have no equity from another home to put toward a down payment — while simultaneously saving for retirement. Continually rising mortgage interest rates present another huge obstacle, said Danika Waddell, founder and president of Xena Financial Planning in Seattle.

According to Freddie Mac, the current average for a 30-year, fixed-rate mortgage is 6.27 percent. A year ago, it was 5 percent.

The goal of homeownership is feeling less and less attainable for many renters in the United States. According to a survey released in March from the Federal Reserve Bank of New York, renters’ reported average likelihood of owning a home was 44.4 percent this year, slightly higher than last year, but down sharply from 51.6 percent in 2021.

Not being able to buy a home can affect Americans’ long-term retirement planning, financial experts say. Homeownership has long been a way to build long-term wealth and supplement retirement income. Once owners retire, they often sell their homes or tap their equity to help fund their retirement and health care expenses.

“There may not be that much difference in one’s ability to save during working years, but the effect of having home equity to draw on in retirement, coupled with hopefully having paid off your mortgage by the time you retire, could make a significant difference in later years,” Ms. Waddell said.

People who can’t afford to buy a home and build equity in their house will be much more dependent on their savings in retirement, said Kristy Jiayi Xu, founder and chief executive of Global Wealth Harbor, an investment adviser in Walnut Creek, Calif. “They may need a more careful budget plan, a more conservative retirement plan, and possibly delay their retirement as well,” she said.

Mortgages force you to save, in a way

While many consumers think of home equity in terms of borrowing money, few consider the long-term financial power of that equity. Once a mortgage is paid off, that dwelling becomes an asset.

“The real power of homeownership is that it’s a form of forced savings,” said Jordan Nietzel, founder of Trek Wealth Planning in Columbia, Mo. “After 30 years, if you have a 30-year mortgage and you own the house free and clear, you now have a $100,000-plus asset you own completely,” he said.

Homeownership’s tax benefits could also help offset future retirement costs. For instance, home sellers may qualify for a tax exclusion for up to $250,000 in capital gains on real estate, or up to $500,000 for spouses filing a joint return, provided the property is their main residence and they lived in it at least two years.

If a couple bought a property for $1 million and later sold it for $1.5 million, for example, they could put the $500,000 difference (minus fees or other costs) toward retirement, Ms. Xu said.

“There aren’t a lot of assets that people hold that can give you that type of tax benefit when you sell it,” she said.

Although homeownership can help cover some retirement costs, financial planners say saving to buy a home can hurt the long-term value of a first-time buyer’s retirement fund. Clients who are saving for a down payment are either not contributing to their 401(k) plan, if one is available, or contributing the bare minimum to get an employer match, Ms. Waddell said.

Scaling back on retirement savings will hobble your retirement account’s value, especially if you stop or reduce your contributions for several years.

“The long-term value of missing these contributions adds up very quickly and will hurt their account values come retirement time,” said Colin Moynahan, a financial adviser with Twenty Fifty Capital Financial Advisors in Charleston, S.C.

Mr. Moynahan estimates that if a 35-year-old who stays invested until age 65 misses three years of $6,500 in annual contributions to a Roth individual retirement account, he or she will lose out on $140,000. That calculation assumes a 7 percent interest rate. For individuals in their mid-20s staying invested until age 65, missing three years would cost $270,000, he said.

Although Ms. Akintola made the maximum contributions last year to her Solo 401(k) (a savings vehicle for business owners), she and Mr. Brown said they would assess whether they could make a contribution at the end of this year.

If clients have a goal to buy their first house within five years, Mr. Nietzel said, it’s acceptable to cut back on retirement savings. If they have a 401(k) with an employer match, however, he recommends that they contribute enough to get it.

“If you have no employer match, it’s OK to stop retirement contributions while you’re saving for that first down payment,” he said. “But once they buy the house, they have to start working on increasing their contributions.”

Renters may need to save more

Ariel and Nick Brengle have been renting a townhouse in Northern Virginia for the past nine years. But when Ms. Brengle switched jobs last year and her salary jumped more than 50 percent, the couple thought: It’s time to buy a house.

“I met with a realtor to find out what houses we could afford, how to budget and how we could save,” said Ms. Brengle, 32, a strategy and communications consultant for U.S. Customs and Border Control. She was disappointed to learn that it would take six to seven years of saving $800 a month to have enough money for a 10 percent down payment, especially if they wanted to buy a house in their neighborhood.

The average cost of the size home they’re looking for — two or three bedrooms and two bathrooms with a basement — is between $650,000 and $890,000 in their area, Ms. Brengle said. For now, buying is out of reach, said Mr. Brengle, 35, a freelance cinematographer.

Ms. Brengle said she and her husband were saving only about $100 a month for a down payment because they wanted to continue contributing to her 401(k). “I would be really uncomfortable not saving for my retirement,” she said.

Some financial planners say being a long-term renter can be beneficial because you save on property taxes and maintenance costs. “People compare rental costs to mortgage costs as if they are apples to apples, and they are anything but,” said Valerie Rivera, founder of FirstGen Wealth in Chicago.

While monthly rent is fixed for the lease term, the base cost of a house is only the beginning for first-time buyers. “Property taxes will likely increase, home maintenance will be ongoing even if the home is new, and home repairs and improvements can be massive over time,” Ms. Rivera said.

Yet even renters have been hit hard by inflation and have seen their costs rise significantly. And because renters aren’t building equity, Mr. Nietzel said, they need to focus more on saving and investing for retirement. “Without making a conscious effort to save extra money, renters could fall behind,” he said.

Niv Persaud, managing director at Transition Planning + Guidance in Atlanta, suggested that renters estimate how much they would be spending on property taxes, insurance, lawn care services and furnishings if they were owners, and contribute that amount monthly to a retirement investment account.

Mr. Brengle said that growing up in Tampa, Fla., he had taken for granted that he would one day get married and own a home. “I’m realizing now that it’s not the norm for everyone to buy a house,” he said. “Some people just rent forever.”