Author Topic: Save more or MAX out 401k?  (Read 7277 times)

blackjack

  • Stubble
  • **
  • Posts: 166
Save more or MAX out 401k?
« on: November 05, 2013, 08:10:10 AM »
If im trying to save for a house (20% downpayment), should I still max out my 401k even if it delays the time it takes me to save 20% for downpayment?

willn

  • Stubble
  • **
  • Posts: 248
Re: Save more or MAX out 401k?
« Reply #1 on: November 05, 2013, 08:28:53 AM »
If im trying to save for a house (20% downpayment), should I still max out my 401k even if it delays the time it takes me to save 20% for downpayment?

Depends how long it would delay purchase of a house.  Give us some numbers and a time frame and a house price you're thinking of. 

My gut instinct is that right now real estate prices in most areas are favorable for buying, compared to the stock market, so I'd lean toward saving for a house and leaving my 401k contribution to the match of my employer.

chardog

  • Stubble
  • **
  • Posts: 182
  • Age: 55
  • Location: Austin, TX, USA
Re: Save more or MAX out 401k?
« Reply #2 on: November 05, 2013, 08:32:37 AM »
Maybe you can do both and cut back in some other area(s).

blackjack

  • Stubble
  • **
  • Posts: 166
Re: Save more or MAX out 401k?
« Reply #3 on: November 05, 2013, 10:14:44 AM »
I have almost 10k saved.... Im able to save 400 a week in cash... im only putting 5% into my 401k
(my take home pay in cash is anywhere from 650-1000 (Depends on if i want the OT)
I'll eventually need a car too, but im hoping my current POS last me another 1-2 years

matchewed

  • Magnum Stache
  • ******
  • Posts: 4336
  • Location: CT
Re: Save more or MAX out 401k?
« Reply #4 on: November 05, 2013, 10:31:29 AM »
I have almost 10k saved.... Im able to save 400 a week in cash... im only putting 5% into my 401k
(my take home pay in cash is anywhere from 650-1000 (Depends on if i want the OT)
I'll eventually need a car too, but im hoping my current POS last me another 1-2 years

Still need more information.

When do you want to buy a house? What is your price range? What are your other goals? Does it include FIRE? How do you plan to FIRE?

willn

  • Stubble
  • **
  • Posts: 248
Re: Save more or MAX out 401k?
« Reply #5 on: November 05, 2013, 10:47:36 AM »
I wouldn't change anything.   At 400/week in savings, you can save another 20K this year.  That gives you 30K or 20% down on a 150K house.  But you may want to wait another year so you have 20K in savings for closing costs + emergency fund.  Or buy a cheaper house.

Point is, you don't want to buy a house without extra savings.  Roofs and water heaters break, by law, when you don't have money ;)

This is generic, adjust for your goals, make sure you know why you want a house, and that you'll be owning for at least 3 or more years.

blackjack

  • Stubble
  • **
  • Posts: 166
Re: Save more or MAX out 401k?
« Reply #6 on: November 05, 2013, 11:04:26 AM »
thanx I just rent right now... ideally next august (at least thats what my fiance wants, were not exactly on the same page with FIRE but pretty close)
she makes 50k gross

around 175-225k is what were thinking
i want to retire ASAP!! hopefully within 10-15 years from now
« Last Edit: November 05, 2013, 11:07:24 AM by blackjack »

dantownehall

  • Stubble
  • **
  • Posts: 152
Re: Save more or MAX out 401k?
« Reply #7 on: November 05, 2013, 11:25:17 AM »
I'm not telling you to do this necessarily, but I was recently in a similar situation and I cut my 401k back to just get the company match while I saved for the down payment.  Worked for me, just moved into the house 2 months ago.

Dezrah

  • Bristles
  • ***
  • Posts: 458
Re: Save more or MAX out 401k?
« Reply #8 on: November 05, 2013, 11:27:59 AM »
This is our plan:

1) minimum 401(k) to full employer match
2) max out Roth IRAs
3) max out HSA
4) accelerated student loan payments (N/A for you)
5) the rest to house savings

The house we buy will be priced such that we'll be able to max out our 401(k)s and then have no more than 30% of our take-home pay go toward payments. 

I also regularly double check that at any given moment we're at least saving enough to meet the 8x salary mark by the time we're 67.  It would suck if it actually happened that way, but it's a bare minimum I could absolutely live with.

So if I were in your shoes, yes I would personally reduce the amount I saved for retirement on a short term basis until I bought a house. 

Keep in mind you're choosing between a path that is "excellent" and a path that is "awesome," so don't waste too much anxiety either way.  Good luck.

msilenus

  • Pencil Stache
  • ****
  • Posts: 517
Re: Save more or MAX out 401k?
« Reply #9 on: November 05, 2013, 12:05:45 PM »
If you have a high enough savings rate, and if your plan offers 401(k) loans, then you might not have to choose.  You could consider using a 401(k) loan as a bridge loan to finance whatever part of your downpayment you're short, and then pay it off as quickly as possible after you buy.

That would allow you to get 100% of eligible money into your pre-tax 401(k), and even effectively fund some of your downpayment with pre-tax dollars.

Be very careful if you go that route though.  Do your research and understand all the ways in which your expenses would change when buying a home, as well as understanding the interest rate and repayment schedule on the 401(k) loan, so you fully understand your ability to dig yourself back out of the hole after you dig it.  Whether or not this is a sane approach depends mightily on how much house you're thinking of buying, and what your expenses would look like relative to your situation now.

Edit: You should also understand that 401(k)s are creditor-protected in ways home equity often isn't (varies by state as I understand things.)  I just realized I was assuming you have no debt so that wouldn't matter, but that might not be correct.

willn

  • Stubble
  • **
  • Posts: 248
Re: Save more or MAX out 401k?
« Reply #10 on: November 05, 2013, 12:16:43 PM »
You could consider using a 401(k) loan as a bridge loan to finance whatever part of your downpayment you're short, and then pay it off as quickly as possible after you buy.

No way would I recommend that.  He's saving like a champ, so he can be patient.  The risk with 401k loans is too great: You are required to pay them back immediately upon leaving that company, or it counts as a penalized, taxable distribution.  If he gets a better offer, or gets laid off, this becomes a huge hassle.  And, you miss out on possible market gains of your money.

blackjack

  • Stubble
  • **
  • Posts: 166
Re: Save more or MAX out 401k?
« Reply #11 on: November 05, 2013, 12:46:02 PM »
btw my company doesnt offer any matching on 401k because they offer an impressive pension.

msilenus

  • Pencil Stache
  • ****
  • Posts: 517
Re: Save more or MAX out 401k?
« Reply #12 on: November 05, 2013, 12:49:12 PM »
You could consider using a 401(k) loan as a bridge loan to finance whatever part of your downpayment you're short, and then pay it off as quickly as possible after you buy.

No way would I recommend that.  He's saving like a champ, so he can be patient.  The risk with 401k loans is too great: You are required to pay them back immediately upon leaving that company, or it counts as a penalized, taxable distribution.  If he gets a better offer, or gets laid off, this becomes a huge hassle.  And, you miss out on possible market gains of your money.

If you contribute only $7500 to your 401(k) in 2014, once Jan 1 2015 rolls around, you've locked in a decision to pass on $10,000 tax avoidance that you'll never, ever get a chance to reclaim.  How much that is worth depends on your tax bracket, but it can be quite substantial.  If you can mitigate the risks, not taking that money can be actively bad.  If you can't mitigate the risks, then you need to pass on it, of course.  The question is which one attains.  You're raising two concerns I did not.

I think the concern about opportunity loss is bogus.  You miss out on investment gains no matter how you fund your downpayment, be it a taxable or tax-advantaged account.  That's not a unique property of using a short-term 401(k) loan, it's a solid argument against buying a house at all.  (If only my downpayment were in the market for the last year!)

The second is extremely important: you need to BOTH a) be very secure in your job, and b) have a strong plan for paying off your 401(k) loan within 60 days (not immediately) if the economy tanks and you lose your job.  That could be a line of credit from your family, cash advances from credit cards, banked vacation that will be paid out by the employer on termination, a HELOC --just about anything, but it needs to be in addition to your emergency plan to keep yourself afloat.

It's *perfectly okay* if Plan B is worse than having just saved up the whole downpayment, because you plan to go with Plan A nine times out of ten.
« Last Edit: November 05, 2013, 12:50:55 PM by msilenus »

nataelj

  • 5 O'Clock Shadow
  • *
  • Posts: 51
Re: Save more or MAX out 401k?
« Reply #13 on: November 05, 2013, 01:58:30 PM »
I'd be a bit wary of "gut feelings" about the housing market. It might be a good time to buy in some areas, but I can say from research in my own area of late that there are some areas where it is decidedly not a good time to buy anymore, if anything I think we're headed toward a bit of a bubble again. Disappointing for me since I did what you're saying, opted to lower my 401(k) to save for a down payment, regretting it now.

Besides, you're looking to live in this house, not rent it, right? In which case the real investment profit to you is potentially turning some of your rent into capital accumulation. Maybe compare your current rent to the money you'd pay for a mortgage and see when the amount of interest you'll pay (i.e. the rent on your borrowed money) is lower than your current rent. Then add a safety margin for extra expenses associated with owning and make the calculation from there. I've attached a sheet to help play with this calculation some if you like, it's based on an MS Excel template with a few additions I made to compare more easily. Not professionalized so sorry if it's easy to get lost in, but maybe a good starting point.

I share because I did this calculation myself recently and, when I found a way to move to lower my rent some, came to the conclusion that it was in fact a very bad financial decision to buy now. The answer you come to in this is VERY location and situation specific, so don't take general answers and assume they work for you.

And on the bridge loan, I'm with willn, if you're in such a rush that you have to borrow from that then maybe it's worth delaying a bit.