Do you have to choose between saving for retirement and buying your dream house? It’s a question we get a lot, which is part of a bigger financial challenge: learning how to manage multiple financial goals.
Once you’re earning well and have your emergency fund and personal escrow fund built up with income to spare, it can be tricky to know what to focus on next. On one hand, finding and settling into your forever home is a big deal and something most people want to do sooner rather than later. Heading into retirement with a mortgage isn’t usually ideal, so maybe you should focus on that first. But wait! What about building your retirement savings? A mortgage-free retirement isn’t much good without a nest egg. So, which comes first?
Thankfully, being Smart About Money™ means you may not have to choose. You just need to be intentional.
Smart: Put Compounding Interest to Work
Your first priority should be saving for retirement because those savings get a unique boost, thanks to compounding interest. Putting money into your retirement accounts during your early working years means it often has decades to grow. The earlier you start, the more time compounding interest can work its magic, helping your savings grow exponentially. Waiting even a few years to start, or pausing retirement contributions to free up cash for a home purchase, can be a much higher opportunity cost than you’d expect. Even with catch-up contributions, it takes a lot more money to get to the same place than it would have had you let compounding interest do the heavy lifting.
The goal is to get your money working while you’re working, so it can carry more of the weight by the time you’re ready to retire. Ideally, that means contributing up to the IRS maximum in your Roth 401(k)–not just enough to get the employer match, but the full amount. If you’re a high earner, this may feel like a big commitment, but there’s a reason why it’s one of our 4 Habits for Building Wealth. Working smarter is better than working harder ten times out of ten! To learn more about the power of compounding interest, watch our video here.
Also Smart: Give Yourself a Flexible Future
Now, that doesn’t mean buying your forever home is the opposite of building wealth. As we mentioned, buying early gives you more time to pay off the mortgage before you retire, which is often a wise financial move but doesn’t have to be a hill you die on. It’s more important to be smart about how you structure your home purchase.
Think about how a large mortgage payment can impact your retirement overhead–the minimum dollar amount you need each month just to keep the lights on and a roof over your head. The higher that number, the more it eats into your retirement income, costing you financial flexibility. And flexibility is one of the most valuable retirement assets you can have. If your health changes, family needs crop up, or you simply want to change your lifestyle, it’s good to have options.
That’s why we often recommend structuring your home purchase so that your payoff date lines up with your target retirement date. If you take a 30-year fixed mortgage and have 30 years until retirement, the math can work beautifully. If you refinance along the way, aim to do it in a way that preserves the payoff timeline rather than resetting the clock.
One thing worth keeping in mind is that a home is not a liquid asset. You may build equity over the years, but, as Traci says, “You can’t sell the kitchen to put food on the table.” The only ways to access that equity are by liquidating the asset, leasing a portion of the property, or incurring new debt, none of which is ideal in retirement. That’s why a paid-off home is valuable not just as an asset, but as a foundation for a lower-overhead, more flexible retirement lifestyle.
Smarter: Do Both at the Same Time
Saving for retirement and saving for your forever home are both smart, big-picture financial goals. That’s why the smartest move is structuring your finances so you’re doing both simultaneously: making mortgage payments on a timeline that targets payoff at retirement while fully funding your retirement accounts along the way.
That means taking an honest look at your current spending and asking, “Can I support all three priorities at once–my lifestyle today, my mortgage payments, and my retirement contributions?” If the answer is yes, you’re in a strong position. If buying your dream home would mean pausing retirement contributions or contributing less than the IRS maximum, it’s worth reconsidering the price point, the timing, or both. Your forever home is important, but it isn’t worth your financial stability in the long run.
Smartest: Enlist the Right Kind of Help
Every situation is different, and striking the right balance between mortgage vs. retirement savings depends on your income, your timeline, your existing savings, and what you want retirement to actually look like. A financial advisor can help you understand how all of these factors intersect and how you can map out a plan that works for where you are and where you want to go. That way, your forever home and your retirement fund can grow together, not compete with each other.
Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Traci Richmond and not necessarily those of Raymond James. You should discuss any tax or legal matters with the appropriate professional.