Save for a down payment and retirement, all at once? It’s tricky

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, Akintola said.

For the past six years, the couple, both self-employed, have been renting in Brooklyn, New York. Now they are looking to buy, possibly there or in Los Angeles. Despite their combined six-figure salary, 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 Akintola, 33, who is the founder of WONU, a marketing agency that focuses on live events, and ITA, an outdoor goods brand. Brown, 35, is a portrait photographer.

The couple are also considering Atlanta, where their money would buy them more space, Akintola said.

The cost of owning has become so high in many areas of the country that it is especially hard for first-time homebuyers, 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 per cent. A year ago, it was 5 per cent.

The goal of homeownership is feeling less and less attainable for many renters. 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 per cent this year, slightly higher than last year, but down sharply from 51.6 per cent 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,” 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 CEO of Global Wealth Harbor, an investment adviser in Walnut Creek, California. “They may need a more careful budget plan, a more conservative retirement plan, and possibly delay their retirement as well,” she said.

Mortgages as a kind of savings

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, Missouri. “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, 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, 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, South Carolina.

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% interest rate. For individuals in their mid-20s staying invested until age 65, missing three years would cost $270,000, he said.

This article originally appeared in The New York Times