Personal Finance Essentials
Home Ownership and Retirement Planning
Home Ownership vs. Retirement:
Making the Right Financial Choices
Priorities: Retirement First
When resources are limited and financial goals are competing, retirement savings should take priority. Retirement is the one financial goal that cannot be financed after the fact. You cannot take out a loan for retirement. Every year you delay saving for retirement is a year of compound growth permanently lost. A home can be purchased while you are living in it — the mortgage spreads payments over thirty years. College can be partially financed with student loans. Retirement cannot. If you must choose between contributing to a retirement account and making extra mortgage payments, contribute to retirement.
Do Not Borrow from Your Retirement Plan for a Home
More than one in four American workers have used their 401(k) for home-related purposes. This is almost always a mistake. When you borrow from a retirement plan, you remove money from compounding growth. If you leave your job before repaying the loan, the entire balance becomes taxable income subject to a 10% penalty. Helping an adult child buy a home by withdrawing retirement funds is equally problematic: an early withdrawal before age 59.5 is taxed as ordinary income plus a 10% penalty — meaning to give a child $60,000 you must withdraw nearly $90,000. The lost compounding on those funds can be devastating.