Putting Off Retirement Savings Till You Buy a Home? Here's Why That's a Bad Idea

Buying a home is an expensive prospect these days. In September, the median sale price for an existing home was $394,300, says the National Association of Realtors.

If you're aiming for a 20% down payment on a median-priced home, that means you'll have to come up with about $79,000 in your savings account to be able to buy. And so you may decide to first focus your efforts on purchasing a home, and then start saving money for your retirement.

It's easy to see why you may be inclined to go this route. Homeownership is something you may have a desire for now, whereas retirement might be decades away. But if you wait too long to start saving for retirement, you'll risk coming up short on funds later in life.

The problem with prioritizing homeownership

You may be eager to become a homeowner so you can stop paying rent. And it's easy to see why you'd rather pay down your own mortgage loan than somebody else's. But if you don't start to allocate funds to retirement savings until you've saved enough for a down payment and purchased a home, you'll risk not having a large enough nest egg to meet your goals during your senior years.

Let's say you're trying to save up an $80,000 home down payment, and you're able to sock away $8,000 a year. That means you're a decade away from owning a home.

If you were to split your $8,000 for your home down payment so that half goes into your IRA or 401(k), it would take you 20 years to purchase a home. That may not be optimal. But it could also help ensure that you're able to build up more of a nest egg for retirement.

Remember, too, that you might think you'll be able to pump more money into retirement savings once you're done amassing a down payment. But that may not happen for one big reason -- you might end up having to spend that money on expenses like property taxes, maintenance, and repairs, which are costs you don't bear when you rent.

In fact, if you put off retirement savings until you've purchased a home, you might end up in a situation where you never manage to fund your IRA or 401(k) plan at all. That's clearly not a good situation to put your future self in.

Striking a balance

You might really want to own a home. But let's say that instead of saving $8,000 a year for a down payment, you only save $4,000, and the other $4,000 goes into a retirement account. If you continue to save at that level over a 40-year period, and your investments deliver a 10% average annual return, which is in line with the stock market's average, you'll end up with almost $1.8 million in retirement savings.

Meanwhile, let's say you don't do that and instead, put off retirement savings completely for 10 years so you can save $8,000 a year toward a home purchase. Let's also assume that once you've bought your home, you have enough money to put $4,000 a year into a 401(k) or IRA. If you contribute $4,000 annually for 30 years, you'll end up with $657,000, assuming that same 10% average annual return.

Now that may be enough money for you to retire on. Or not. It's hard to know. But it's definitely nowhere close to $1.8 million. It's only about one-third as much, in fact.

That's why you should ideally try to fund your nest egg alongside saving up for a home. It might mean having to wait longer to buy, or buying with a smaller down payment. But that way, you're not sacrificing your retirement savings to get into a home of your own sooner.