Should you plunder your retirement account to buy a house?
Left to grow, a retirement account can improve your future.
- Looting a retirement account can be a risky move.
- There are few financial tools as powerful as compound interest.
If you’re buying a home and you’re worried you won’t have enough money to use as a down payment or to compete with other homebuyers, you might be wondering if you should raid your retirement account to claw back. extra money.
The answer is almost always no. Here’s why.
It’s a “today’s” problem.
The current boiling housing market is temporary. We don’t know when it will cool down, but economics has taught us that what goes up tends to go down. Either it slows as the Federal Reserve continues to raise interest rates, or it softens as more homes come on the market. Of course, housing prices will normalize at some point.
Looting your future to fix a problem you are having today can be a costly mistake.
Years ago I interviewed a loan officer in Northern California. This lender told me that he frequently advises people to empty their IRAs, 401ks, and other retirement accounts to buy real estate in California. When I asked him how he could make such a suggestion, he said, “Real estate values in California will always go up in value.
If you’ve bought into the idea that buying a home gives you an asset whose value is guaranteed, I ask you to consider a few “what ifs.”
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What if a natural disaster hits your neighborhood and some of your neighbors are unable to rebuild? What happens to your home’s value when the area is messy?
What if someone on the street starts making drugs in their basement, the media reports their arrest, and your neighborhood is suddenly considered unsafe?
What happens if the school district you’re in loses accreditation or students start performing poorly on standardized tests? Even if you don’t have kids in school, the reputation of the local school district can seriously affect the value of your home.
Yes, the value of your retirement account will rise and fall, and it can seem as risky as a house losing value. The difference is that the story illustrated the performance of the stock market after the disappointment of a bear market. The same cannot be said for a neighborhood that is going through difficult times. Typically, those who can afford to leave leave the neighborhood and those who stay are stuck with stagnant home values.
Compound interest is hard to beat
Let’s say you’re 35 and you decide to withdraw $40,000 from a retirement account to buy a house. If you had left the money in the retirement account, paying an average of 7%, in 32 years (when you reach full retirement age), it would be worth $348,611.
None of us should expect the huge jump in home values we’ve seen over the past two years to become the norm. It is the combination of historically low interest rates intended to stimulate the economy, coupled with a thin housing inventory that has produced inflated prices.
Typically, homes appreciate 3.5% to 3.8% per year. While steady growth sounds nice, it’s important to consider the amount of money that is pumped back into the property through home repairs, general upkeep, insurance, and property taxes.
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Questions to Ask
Before making a final decision, ask yourself the following questions:
- Am I comfortable with the amount I have saved for retirement so far?
- Am I willing to give up the money my account would have earned from compound interest?
- Do I have a plan to boost my retirement fund so I can enjoy my golden years?
- Am I likely to regret trading future financial security for something I want today?
- Does it make more sense to save money and wait for the market to stabilize to buy a house?
Taking money from a retirement account is always a big deal and a decision that should not be taken lightly. If you’re weighing your options and still unsure, consult your financial advisor for their perspective on the situation.