Should Millenials buy a home or save for retirement?

Shannon Lee | Improvement Center Columnist | June 22, 2015

Purchasing your own home is a rite of passage that every generation looks forward to -- but is it really the best option? Moving into your own home and carrying a mortgage has the downside of pulling a large chunk of your income into one basket, which leaves your retirement fund without much extra cash. Which makes more financial sense in the long run: Saving for retirement or moving into that dream house?

Why a retirement fund is the way to go

Eric J. Schaefer, CFP(r), CRPS(r), is a financial expert with Evermay Wealth Management in Arlington, VA -- and he's also a millennial. When friends ask him whether they should save for retirement or buy a home, his answer is simple and blunt.

"If you have to choose between saving for a home or saving for retirement, you may not be able to afford to buy a house," he said. "This is usually not a welcome message, but it might be the advice that prevents them from making a large financial mistake."

Rather than sink their hard-earned savings into a down payment, Schaefer recommends making that money work for you. "I always recommend everyone contribute at least as much to their retirement as their employer matches," he said. "Even in cases where there are student loans, credit card debt, auto loans or other liabilities, the immediate impact of a 25-100% match is greatest. Most Gen X'ers and Millennials won't have a traditional pension and will likely have a very different Social Security benefit in the future, meaning the only one that can provide you with a comfortable retirement is you!"

When it makes sense to buy a home

Though there is a strong argument for retirement savings first, sometimes circumstances might push you into home ownership earlier than you expect. Where you are in your life right now, and what your immediate future holds, can make the difference. For instance, are you a newlywed who just learned you have twins on the way? That little studio apartment that has been perfect for so long is probably not going to work in about nine months, so it's time to either upgrade to a larger space or take the plunge and purchase a home.

When you do choose to purchase a home, be smart about it. "I don't often tell my clients to reduce their saving for the future, but if you're 99% of the way there on your saving goal for the purchase of a home, go for it! Of course, this assumes you aren't draining all of your resources in order to purchase the home," Schaefer said. And keep in mind that owning a home is more expensive than it appears at first blush -- you must consider the cost of moving, furniture, necessary upgrades and everyday maintenance.

If you do choose to buy a home, you can get back on track with your other goals. Once the home purchase is done, use the perks to fund your retirement accounts. "Many first time homebuyers find the deductible mortgage interest to be a welcome surprise and get a large tax refund after their first year of home ownership," Schaefer points out. "This would be a great opportunity to play catch up on your retirement savings and get back on track."

If you already own your home…

Already took the plunge? Now that you are moved into your home, you might be wondering if you should work hard to pay down the mortgage faster, or if that money is better spent toward a retirement fund.

"There are two reasons why it makes sense for most Millennials, especially those with homes, to make retirement savings a priority," Schaefer said. "First, compound growth is extremely valuable. At age 25, if you save $5,000 per year for the next ten years earning 7% annually, this money would grow to about $560,000 by the time you're 65. If you do the same exercise starting at age 35, you will need to save $10,000 to reach the same goal. At 45 you'd have to save $20,000 and 55 would require $40,000."

Assuming that you have a reasonable interest rate on your home, sinking extra cash into your retirement is the way to go. Start putting that money away now, while life is rather calm -- because surprises can and do happen. Life will throw additional expenses your way, such as child care, college, healthcare issues and more. Put money toward retirement now, before life catches up with you and makes it tougher to save.

Photo credit to Myryah Shea

About the Author

Shannon Lee is a freelance writer and occasional novelist with a serious weakness for real estate. When she's not writing, she and her husband are taking road trips to explore covered bridges, little wineries and quaint bed-and-breakfast inns in their beloved Pennsylvania.