Should You Save for a Home or Retirement?

It’s possible to save for a home and retirement at the same time, but this kind of financial multitasking requires careful planning, prioritizing, and budgeting. 

“A big mistake I see people make is having an ‘all or nothing’ attitude with money. Either be completely debt-free or invest. Either save up to buy a home or invest,” says Kris Whipple, partner and financial advisor at Kristopher Curtis Financial in Nashville, Tennessee. “I say do both. If the house is more important to you, lean that way, but don’t give up the opportunity of compounding growth.”

Saving for a home and your retirement at the same time is a balancing act, even with a budget.  If you haven’t prepared for retirement and you are closer to it, choosing long-term financial stability should take priority. If you want to balance both, here’s what you should know:

Impact on Your Budget 

When you are trying to meet multiple, large financial goals (in this case, buying a home and saving for retirement), the key is to make a budget that you can stick with. A realistic budget will allow you to track your cash flow and help you work towards gaining long-term financial stability.  

The 50-30-20 budget rule can help you save for retirement while paying off your debts. The method works by dividing your after-tax pay into three buckets: needs (50%), wants (30%), and savings (20%). 

• Needs (50%): Housing, transportation, groceries, utilities, minimum debt payments
• Wants (30%): Entertainment, eating out, gym memberships, travel
• Savings (20%): Debt repayments beyond the minimum, retirement funds, emergency funds

If you want to buy a home, reducing your debt is critical to getting a good mortgage rate or even a loan at all. Try to keep your debt-to-credit ratio lower than 36% and improve your credit score as you pay down your credit cards. Not only is having a low debt-to-credit ratio good for loans, but it is also important as you head into retirement because carrying it into retirement may lower your quality of life. 

If you have to use retirement funds and Social Security to pay down high-interest debts, it means less money for essentials and extras, like travel, that may be important to you. If your debt increases over time, you risk running through your retirement savings to keep up with payments.

Taking stock of your debts before retirement and planning to pay them down will help protect your financial security. 

Impact on Cash Flow

Buying a home can have an impact on cash flow in the short- and long-term: 

Short-Term Impacts

If you use all your savings for a down payment, you run the risk of becoming house poor. Remember that you will not have access to cash from your house until you’ve had a chance to build equity in the property. 

Lenders will typically require you to have at least 20% equity in your home to apply for a HELOC or home loan. Plus, it can take 30 days or more to get approved to borrow from your home’s equity, meaning you may have to wait to get your cash. 

However, some experts say a mortgage is a good way to hold onto cash in the form of equity. If you have enough equity in your home at retirement age, selling and downsizing (even to a rental) may provide an influx of cash and allow you to be free from the hidden costs of home ownership.

“In paying a mortgage, you are unknowingly putting even money into a retirement savings bank, in the form of paid down asset and big-time equity,” says Rhett Wiseman, a private real estate investor and founder of Wiseman Advising LLC.  

But owning a home without adequate retirement savings may be risky regarding access to cash. For example, if you need to replace your roof or have an unforeseen emergency, like a burst pipe, you may have to pull from savings to fix it.

In addition, lawn and yard care may be costly, or if you pay for gas or oil to heat your home and the charges go up, those are all financial hits that can add up over time. If you cannot maintain your home, it may lose some of its value over time due to disrepair.

Long-Term Impacts

Managing the expenses that come with homeownership can be difficult after retirement, especially if you rely on Social Security. The National Institute of Retirement Security reports that 40.2% of retirees live solely on Social Security payments, with the average monthly benefits being approximately $1,860. This may not be enough to cover home maintenance, as well as food, medicine, and other necessities. 

“Inadequate retirement savings can lead to a reduced standard of living and extended working years, while not owning a home means missing potential asset appreciation and tax benefits,” says William Bevins, a certified financial planner and CTFA for Cypress Capital in Franklin, Tennessee. 

Between the two goals, “prioritizing retirement savings is usually advisable,” he says.

Consider All Your Financial Priorities

When contemplating how to save for a home and retirement, it’s a good idea to evaluate your personal goals and circumstances, like your age, current and potential future income, your spouse or partner’s contribution, and your timelines for retirement and purchasing your first home. 

For example, suppose you are planning to start a family or have a new baby. In that case, you will have to set aside money to pay for related costs like anything not covered by your insurance for the birth, adoption costs, new baby gear, and ongoing expenses like childcare, if needed. 

Families with young children may want to add to a college fund, which will also take dollars out of your budget. If your children are older, you are part of the sandwich generation, and may also be caring for aging parents. 

Whatever your stage in life, your dollars will always have to stretch further if you are prioritizing a home and retirement at the same time. And your goal posts for each item will likely be very different at 25 than at 45. Financial security will become more important as you age; any amount you can put toward retirement is crucial.

“For a 45-year-old, the focus should be on boosting retirement savings due to the limited time remaining until retirement,” he continues. “While balancing home ownership goals is possible, retirement savings should take precedence to ensure financial security, [and] tailoring advice to each client’s age and personal situation is an important factor for effective financial planning.” 

How To Balance Both Financial Goals

It’s possible to save for both retirement and housing goals simultaneously; some experts say purchasing a home is an investment in your retirement. 

“Believe it or not, but when buying a primary home, you are actually killing two birds with one stone. Homeownership and retirement savings,” Wiseman says. “The largest asset and most expensive purchase that most people will ever make in their lifetime will be their primary home. We can use our home as both a place and a family, but also as a significant driver in saving for retirement.”

Here’s how to work toward buying a home and saving enough for retirement: 

Determine How Much To Save

One of the biggest financial hurdles you may face as a homebuyer is affording a down payment. In 2022, 80% of buyers financed their home purchase, according to data from the National Association of Realtors (NAR), and the average down payment for first-time buyers was 8%. 

If saving 8% or more feels too difficult, for example, government-insured mortgage programs like FHA loans only call for a 3.5% deposit, making them more accessible than conventional mortgages for first-time buyers. (Keep in mind that these loans—and conventional ones with down payments lower than 20%—require mortgage insurance. If you have to pay mortgage insurance, these lower-cost mortgage loans may mean paying more in the long run.)

If you or your spouse is an armed services member or veteran, you may qualify for a mortgage loan from the U.S. Department of Veterans Affairs, which calls for zero down. 

However, that price will likely be lower or higher, depending on where you live. If you are on a tight budget, consider smaller and less expensive homes on the market. 

In addition, like all loans, the higher your credit score, the better your interest rate on a mortgage loan will likely be, and the more money you can pay upfront for a home, the more equity you have out of the gate. Home equity is the current value of your home minus your mortgage. As you get older, you retain more ownership of your home. Equity is valuable in retirement because as you pay down your loan, you can access more money in a sale or cash-out refinance. 

Diversify Your Assets

While home equity is an asset in retirement, it shouldn’t be your only one. To be adequately prepared for retirement, most financial planners advise saving at least 70% to 80% of pre-retirement income. The proverbial “three-legged stool” of retirement consists of Social Security, personal savings (in accounts like CDs, savings accounts, and mutual funds), and employer-sponsored retirement plans like 401(k)s and/or IRA accounts.

Anything you can automate each month towards your retirement can help you stay on track. Maxing out your retirement contributions every year, opening a spousal IRA (if it applies to you), taking advantage of any employer-match plans, like a 403(b) or 401(k), and investing in a SEP IRAs and Solo 401(k) accounts as an individual or small business owner, are all ways to set money aside for your retirement. 

Establish Timelines

When you are planning for long-term financial stability, it can help to establish a timeline for your goals. Having a sense of when you hope to achieve certain financial priorities can help you see the big picture as well as plan your budget and stay on track with your daily spending and savings. 

For example, let’s say that you’re planning to buy a home. Setting a timeline can help you determine how much you need to save each paycheck to go toward your down payment. It will also factor into your choice of savings plan.

“If you plan on purchasing a home within three years, we typically suggest holding your down payment in cash in checking, regular savings, or high-yield savings accounts—or in near-cash accounts and investments like CDs or money market funds. This guarantees you’ll have access to the funds when you need them and protects them from the inevitable ups and downs of the market,” Viktorin says. 

Similarly, your retirement timeline will depend on how old you are and how long you want to wait to retire. The full retirement age for Gen X and Millennials, as of 2024, is 67 years. Take your current age and subtract 67 to determine how long you must contribute to a retirement fund. For example, if you are 30 years old, you will have 37 years to contribute to an account. If you are 40, you have 27 years, and so forth. 

If you are saving for a home, you may need more time to max out your retirement contributions. Consider what you can afford to contribute, and increase your retirement contributions as you age. 

Simplify Your Savings

Automating your savings can help you simplify the process of achieving your goals. 

If your employer offers a  401(k) or 403(b) retirement plan, especially one with employer-matching opportunities, experts agree that you should sign up for it. Not only does this give you a tax advantage, but automating monthly payments can keep you from being tempted to skip a payment to your retirement fund. 

Usually, the money earmarked for your retirement account is automatically withdrawn (pre-tax) from your paycheck. 

“Missing out on an employer match to free up additional money for a down payment is generally not advisable, for example, since you’d be leaving free money on the table,” says Ryan Viktorin, CFP, Vice President and Financial Consultant at Fidelity. In addition, you or your spouse, if you have one, could consider opening an IRA to diversify your retirement funds.

House Hacking

One idea for supplementing your retirement income is to use real estate investments to support your retirement savings. 

“House hacking is a phenomenal way to build real estate assets using lower residential financing for owner-occupied homes. This is a strategy where a buyer purchases a home at an owner-occupied interest rate and down payment percentage, lives in it for 12 months, and then moves out and rents the unit,” explains Wiseman. “They continue this practice yearly until they’ve been able to amass a strong portfolio. This is a great way to add units to your portfolio if it’s harder to obtain capital.” 

House hacking is one way to support retirement savings if you have a disposable income and don’t mind moving from home to home. Wiseman notes that this method is appealing because ““owner-occupied residential purchases require anywhere from 3% to 10% down payments, while investment property usually requires 15% to 25% down payments, on average.” 

However, he notes, “This allows for people to take on more leverage and use less cash, which isn’t always a good thing.” 

More Ways To Boost Savings

There are other ways to supplement savings and build assets for retirement. Consider passive income streams, such as renting a room in your home or your primary residence over weekends and holiday breaks via a home-sharing platform. If you have the money, buying a second home could set you up to earn rental income, although it may be a reach to purchase another property if saving for the first one is difficult. 

Other ways to supplement savings for a down payment on a home could include renting a smaller and cheaper apartment for a period while you save, taking on a side hustle, asking your friends or family for a financial gift (the IRS allows gift exclusions of up to $18,000) that they can write off their taxes. 

Seeking Professional Advice

A fee-only financial advisor or planner can help you create a personalized plan designed for your situation. Financial advisors and financial planners can help you create a budget, decide which financial vehicles to use for savings goals like purchasing a home, and make a timeline for meeting them. 

“No matter your life stage or current financial picture, meeting with a financial advisor is a great step towards achieving your money goals and improving your financial wellness,” Viktorin says. “There are also a lot of digital tools available online to help you understand your expenses and savings goals if you don’t feel quite ready to meet with someone yet.”

Financial apps, like Simplifi by Quicken, or digital tools like AARP’s Money Map and others, can help you budget for your financial goals and may offer some general guidance on saving for priorities like owning a home. 

In addition, most large banks, credit unions, and investment firms may offer one-time free consultations, help you create a free plan, or provide digital tools on their websites to help you get started. 

The Bottom Line

Most experts agree that retirement savings should take precedence over other kinds of savings, but that doesn’t need to stand in the way of the path to homeownership.

Prioritize your savings goals by creating and adhering to a budget, automating retirement contributions, taking advantage of employer-matching, cutting back on non-essentials, and using timelines to help you stay on task. Talk to a financial advisor or use online tools to help you calculate your retirement budget and decide how much house and mortgage you can afford to take on. A little planning now can help you minimize financial risk later on.