Save, save, save.
From economists to personal finance gurus, we’re inundated with the message to save as much of our income for retirement as possible. We’re told to start early and be consistent.
But should retirement be our only goal? And how much should we put away?
Tom is 31 and has taken to heart the mantra to save. He’s earned an above-average income throughout his 20s and, by regularly contributing a portion of his income and benefiting from employer matching and solid investment returns, has already built a sizable nest egg. He has $75,000 in a Roth IRA and more than $100,000 in a 401(k), as well as an emergency fund with six months’ worth of expenses.
He’d also like to buy a home and start a family with his wife in the next few years. However, despite their savings, most of it is locked away in retirement accounts and they don’t have enough cash for a down payment. Tom is now wondering if he made a mistake by being so focused on his retirement goals.
There’s some good news for Tom. He’s in a situation where he has enough saved that if he retires at 65 and earns a conservative annual return of 7% investing his retirement funds, he could stop contributing today and have around $1.75 million at retirement. So, he may be able to direct a substantial portion of his savings or take-home pay going forward to a down payment and still be financially prepared to retire when the time comes.
Read more: 82% of Americans are missing out on a savings account that pays over 10 times the national average
He can free up some of his retirement funds by withdrawing from his Roth IRA. Since contributions to a Roth IRA are made after-tax, you can withdraw them without paying any penalty. If you’re a first-time homebuyer and your account has been open at least five years, you can also withdraw up to $10,000 in earnings that would normally be subject to a 10% early withdrawal penalty if you’re below age 59.5.
If allowed by his employer, Tom may also qualify to take a loan up to $50,000 out of his 401(k). This needs to be repaid into the plan with interest, but if you’re using the funds to buy a principal residence, then the term to pay it back can extend beyond five years. If the loan isn’t repaid, it will be considered a distribution and incur taxes and potentially the 10% penalty for an early distribution.
