{"id":2729,"date":"2022-01-28T12:13:20","date_gmt":"2022-01-28T12:13:20","guid":{"rendered":"https:\/\/wealthface.com\/blog\/?p=2729"},"modified":"2022-02-16T09:09:46","modified_gmt":"2022-02-16T09:09:46","slug":"buy-home-or-invest-for-retirement","status":"publish","type":"post","link":"https:\/\/wealthface.com\/blog\/buy-home-or-invest-for-retirement\/","title":{"rendered":"Should I Buy My Dream Home, or Invest for Retirement?"},"content":{"rendered":"
\"\"<\/figure>\n\n\n

Once you start earning enough money to start investing<\/a><\/b>, one question<\/strong> comes up pretty quickly \u2013 is it better to save up for a down payment on a property, or invest the same money in a retirement plan<\/a>?<\/p>\n\n\n\n

Both of these goals are, of course, very important. In order to have a comfortable retirement, you should start saving for retirement<\/a> as early as possible, so that compound interest works in your favor<\/a>. <\/p>\n\n\n\n

On the other hand, owning a home is an emotional goal for a lot of people, who want to own their own place before they have kids.<\/p>\n\n\n\n

The issue is that, especially early on in your career, it can seem like you have to choose one or the other. And that\u2019s a hard choice to make. <\/p>\n\n\n\n

In this article, we\u2019ll guide you through the relevant calculations, and then show you a couple of ways of planning your financial future<\/a> so that you can have a comfortable retirement and buy a home.<\/p>\n\n\n\n

Invest for Retirement<\/a><\/strong><\/h2>\n\n\n\n

So let\u2019s jump straight in with an answer to the question we started with. For the majority of people, in the majority of cases: <\/p>\n\n\n\n

“it\u2019s better to save for retirement<\/a> before you save to buy a home”<\/strong><\/p>\n\n\n\n

That might seem counter-intuitive, because you will need a home before you retire. It can also be emotionally difficult to deal with, because buying a home gives you a nice place to live, whereas a Roth IRA doesn\u2019t provide you with anything tangible (yet). However, when you look at the numbers it becomes obvious that retirement savings should come first.<\/p>\n\n\n\n

This is due to a simple fact \u2013 in the long-term, the stock market out performs the property market<\/a>. Over the course of 20 to 25 years, the gains you can make on the stock market far outpace those that can be made investing in property.<\/p>\n\n\n\n

And since most retirement plans are invested in the stock market<\/a>, even with a low-risk stock investment you are likely to be better off at the end of 25 years if you put money into a retirement investment fund.<\/p>\n\n\n\n

This is just the general trend, however, and it does not apply in every circumstance. If you are clever, or you know the property market of a particular city or country particularly well, you can make gains investing in real estate. <\/p>\n\n\n\n

However, you will need to be clever, lucky, or very dedicated in order to beat the long-term growth of the stock market.<\/p>\n\n\n\n

Investing<\/a> in this way also reduces your stress, because you don\u2019t have a physical asset \u2013 your home \u2013 which needs continual maintenance in order to hold its value. Using a platform like Wealthface<\/a>, you can set up an investment for your retirement, and just let it run without having to constantly monitor the value of your asset.<\/p>\n\n\n\n

Renting vs. Buying<\/strong><\/h2>\n\n\n\n

For a lot of people, the answer above will be a disappointing one. That\u2019s for two main reasons \u2013 one is that many people have a lot of \u201cemotional capital\u201d invested in the idea of buying their own home, and the second is that renting can seem like a huge waste of money.<\/p>\n\n\n\n

Let\u2019s deal with the second of these points first. Despite many people believing otherwise, rent is not wasted money<\/a>. <\/p>\n\n\n\n

The idea that it is comes from a previous generation \u2013 Baby Boomers<\/a> \u2013 who could buy property relatively cheaply, and who enjoyed that property rapidly increasing in value over many years. The property market is different today, and it\u2019s difficult to realize the same gains.<\/p>\n\n\n\n

In addition, for most people of younger generations, renting makes a lot of sense. Renting means that you are not responsible for maintaining a property, and you can move city (or country) with little notice. <\/p>\n\n\n\n

Ultimately, this freedom to get a higher-paying job across the country may end up being more lucrative then investing your current salary in a house that may fall in value.<\/p>\n\n\n\n

Second, in the answer above we\u2019ve just looked at the monetary arguments for and against buying a home \u2013 not the emotional ones. Money isn\u2019t everything, and if buying a home will make you much happier than not doing so, that\u2019s an important realization. <\/p>\n\n\n\n

And, as many people have pointed out, it\u2019s probably not a great idea to see your house as an investment vehicle anyway \u2013 the property market is simply too complex and unreliable to be a good basis for a long-term investment, and houses are inherently unreliable assets.<\/p>\n\n\n\n

Doing Both?<\/strong><\/h2>\n\n\n\n

There is, however, a way of both saving for retirement and a down payment on a house, at least if you live in the US. Or at least there is in principle.<\/p>\n\n\n\n

This is because the IRS allows you to withdraw money from an IRA to buy a house, and if you take advantage of this you won\u2019t have to pay the normal 10% early withdrawal penalty. <\/p>\n\n\n\n

There are some rules which govern this \u2013 the IRS treats a withdrawal from a traditional IRA as income and you must pay taxes. Withdrawals from a Roth IRA for a home purchase are both tax- and penalty-free as long as the Roth is at least five years old.<\/p>\n\n\n\n

This means that, in principle, you can take $10,000 that you\u2019ve saved into your retirement account, and use it as part of a down payment on a house. <\/p>\n\n\n\n

The downside is that this doesn\u2019t make much sense financially, because this is $10,000 that won\u2019t be earning compound interest<\/a> for the next 30 or 40 years.<\/p>\n\n\n\n

\n
Join our Newsletter<\/div>\n