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I see questions and answers like this one that make a very good point:

Keep in mind it is easy to get a loan for a car, or for a house, or to pay for college; but very hard to get a loan for your retirement.

To that end I always try to max out my retirement savings. Roth 401(k), Roth IRA, and HSA. All of it. However, that leaves me with very little left to save for a down payment on a house. The math is below (and assumes that 26% of gross income goes to all form of taxes, including federal, FICA, state, and local):
Gross Income $65,000
Taxes $16,900
Roth 401(k) $19,500
Roth IRA $6,000
HSA $3,600
Rent (850*12) $10,200
Net Income $8,800

Is the solution just "earn more money"? Assuming I literally spend nothing else (which is unrealistic, obviously) I can only save $8,800/year. The median home price in my city is $300K, so to save for a 20% down payment, this would take me seven years, assuming prices don't keep shooting up. And that's assuming I don't buy anything or ... eat.

Are there other savings vehicles I should be pursuing? Something else I'm missing?

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Michael A
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    you have to provide a long-term model. Do you plan to work till 65 making same or more? Do you plan to have children? Do you have parents/dependents that might require help in 5-10-20 years? Right now your model doesn't look complete, like food cost is missing. – aaaaa says reinstate Monica Dec 31 '20 at 01:05
  • @aaaaasaysreinstateMonica Yes this model is very incomplete. I was trying to put an upper bound on what I could save for a down payment on a house. I mentioned food costs in the question (the bold part at the end). Any additional costs added in, be they childcare, parental care, food, etc. just make the situation worse and mean I can save even less for a house. My long term model will probably involve similar real income (2% or so raises a year, in line with inflation, maybe a promotion or two) – Michael A Dec 31 '20 at 01:08
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    How old are you? You can probably raid your contributions from your Roth IRA with no additional tax or penalty if it has been in place for 5 years. That would help at home purchase time. I'm somewhat flabbergasted that you're putting $25k in retirement jail annually at your income.... – quid Dec 31 '20 at 01:32
  • @quid I'm 33 and I've had my IRA since I was 16. I know about the first time home buyers exemption in Pub 590 so I can put that into the question if necessary. I guess that might be my only option – Michael A Dec 31 '20 at 01:38
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    Roth IRA you can pull out your contributions whenever you want for any reason, in fact I'm not even sure the 5 year limit applies to contributions. So you should have enough in there now to pull together a sizeable amount of the $60k you'd need for a home downpayment if you wanted to. The first time home buyer bit is if you take out gains in addition to contributions, is my understanding. – quid Dec 31 '20 at 01:43
  • @quid Yes, you can take out the earnings and the contributions (Pub 590B, p24) – Michael A Dec 31 '20 at 01:46
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    Right but to take out earnings you need to meet criteria, to take out contributions you don't. You probably have your downpayment already on that basis. Just leave the gains in the IRA and pull your contributions out. – quid Dec 31 '20 at 01:47
  • In your field, can you work remotely? If No: are you passionately attached to your current city? All things are possible, just clarifying. – Fattie Dec 31 '20 at 02:07
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    @Fattie Short answer is "maybe". Personally I think I can work remotely, and at least during the pandemic, my industry (financial/management consulting) has adapted to working remotely. I'm pushing for that to become a permanent fixture at my company but they're on the fence about it. If I can work remotely indefinitely I'm 100% moving somewhere cheaper (probably out in the sticks somewhere if possible). City amenities don't mean much to me but unless I'm working remotely, that's where the work is unfortunately. – Michael A Dec 31 '20 at 02:36
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    I of course don't 10000% understand your situation: but it would seem that you would be incredibly far ahead if you could work remotely ("from the sticks"). Happy new year in all events !!! – Fattie Dec 31 '20 at 03:32
  • As an aside, a 20% down payment isn't the only option to get a mortgage. There are options with as little as 0 down. Granted, there are other factors involved (for example, look up mortgage insurance) so the monthly payments will be much higher (at least for a time), but you won't need a large down payment on hand. – Salmononius2 Jan 01 '21 at 14:48
  • Join the Reserves, any branch. In six years you'll be eligible for a VA loan. – Dave Jan 01 '21 at 17:25
  • @Dave Presumably you have to be in pretty good health for that right? And isn't mid 30s too old? (Serious question; I don't know) – Michael A Jan 02 '21 at 00:33
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    This country really hammers you with homeownership as a requirement of adult life, but if you’re comfortable renting, and living comfortably at your savings rate, there’s nothing wrong with going on renting. – thehole Jan 02 '21 at 02:31
  • @MichaelA I don't have a solid answer, but the best thing you could do is talk to a recruiter. Mid 30's shouldn't be too old. After 9/11 they jacked up the age for entering active duty military service way up. It used to be 35, but they cranked it up to 42 I think. I don't believe the Reserves are as picky. Health-wise, they'll sort you out, unless you're a basket case. If I remember correctly, the Reserves will take almost anyone. – Dave Jan 02 '21 at 02:42
  • Personal opinion on something you didn't ask about: I'd get off the high-deductible health plan/HSA. I've been on one, and you're less likely to get care that maybe you should get, and the tax-advantaged account gets to be more trouble than it's worth. – David Ehrmann Jan 02 '21 at 03:31
  • As I'm from Germany I don't know the benefits of all of these retirement products, but owning a house to not pay rent when retired is another form of saving. So reducing the future payments to some of the mentioned products might not give you deductions from tax or similar, but IMHO it still counts as retirement saving if it goes towards buying property. – Julian Sievers Jan 02 '21 at 09:02
  • 300k house making 65k doesn't mix, no matter your retirement plans. – LarryBud Jan 02 '21 at 20:00
  • You remind me of myself. I suggest doing what my family did, buy a house you can't afford and live in one bedroom while renting out the remaining rooms. My wife and 3 young children lived in the master bedroom and rented out the other 4 bedrooms for 2.5 years, at which point we could afford the entire house to ourselves. We live in Oakland, CA. Average price in our neighborhood is $1.5 million today ($700k in 2013 when we bought). My 3 children will buy houses they can't afford when they become young adults and plan to live in the living room or laundry room for 2.5 years. – Julius Seizure Jan 06 '21 at 18:43

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You are saving 44.7% of your income for retirement and living like a miser as a result, so the question I propose is simply, "Why?" I must admit that the allure of financial security in retirement is very nice, and can seem worthy of extreme sacrifice to attain. However I believe, as I think you are now coming to realize too, that buying future financial comfort at the cost of decades of your life, your youth, your happiness, and your comfort, is a Faustian bargain that leaves you wishing you had used some of that retirement savings to live.

In my opinion a lot of financial advice you will hear is bad. It either comes from financial services that want you to put as much money into their products so they can make more money for themselves, or from people who are already wealthy so the concept of opportunity costs to savings is completely foreign to them. From these people come the "Max your retirement accounts" rules; as you have found out that's simply something us average people cannot do while living a normal life.

So no. I do not think you can, or should, max your retirement accounts and still save for a down payment on a house. All of us average people will have a different balance between what we're comfortable saving and the projected savings we will accrue for retirement. A good rule of thumb, talked about in this answer, is 15% of your income saved will typically amount to being able to withdraw your current level of income every year in retirement. Don't go taking that as gospel though either, I really heavily advise taking an afternoon to stop everything else and have an honest conversation with yourself about your goals for the present and the future. Pull up some retirement calculators on the internet, punch some numbers in at different levels of savings, and ask yourself if you're okay with that. It might not be easy, but you have to be honest with yourself and what you want. Talking about money is never easy, not even to yourself.

Thegs
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    Clearly, the table OP presented doesn't reflect reality. If he were to track every dollar spent the last 12 months, he'd see an awful lot missed. Can one actually save 40%+? Sure. Earn 100K and live like a single person making 60K (but adjust for taxes). I agree, 100%, that while 15-20% is a good target, more is not always better, especially if the budget leaves no room for joy. – JTP - Apologise to Monica Dec 31 '20 at 19:32
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    @JTP-ApologisetoMonica Thanks JTP. I do track all of my expenses and the total is about $500/month (utilities and internet are included in rent so that helps, and no car, kids etc.), but that's why I asked the question as a "worst case"/upper bound on saving. Didn't seem relevant to itemize my whole budget in the question so I left it out – Michael A Jan 01 '21 at 03:30
  • Keep in mind these tax advantaged retirement accounts are designed by congress to be available to a large part of the population, I'd say 90% or so. So if you're not near the top 10% of earners then you shouldn't expect to max them out. – csiz Jan 01 '21 at 18:32
  • @MichaelA - In the end, it's RonJohn's answer, you can't have it all. Setting aside that high percent of income is a choice. Some in the FIRE movement would applaud that, if your goal is to retire early. If your goal is to buy a house any time soon, you'd need to scale back the savings. – JTP - Apologise to Monica Jan 02 '21 at 18:02
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You can't do it all.

This is why I dislike "put everything in your 401k!" advice: it ignores the reality that there are things other than retirement which are worthwhile to spend money on .

RonJohn
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  • This, I regret every dollar I put in my 401k in my 20s – quid Dec 31 '20 at 01:38
  • Obviously I can't change the past but my worry all throughout my 20s was that I wouldn't have enough for retirement so I maxed out the retirement funds that whole time. Probably was a mistake but I guess I'm resigned to renting for a while more – Michael A Dec 31 '20 at 01:44
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    @MichaelA no one has perfect foresight, and "save for retirement when young!" is beaten into people's heads. It's mathematically valid, but ignores houses, vacations, marriage/children, etc, etc. – RonJohn Dec 31 '20 at 01:59
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    @MichaelA Having maxed out your 401(k) benefits alone, even in a single year, puts you well ahead of most people. Whether or not you want to shift gears and put more liquid money aside for a home purchase, I don't think you should feel bad about your choices in these areas. I've never once looked at my accounts and wished that I'd saved less. – Upper_Case Dec 31 '20 at 02:30
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    @quid what I regret is living above my means through my late 40s. The 6% I contributed up through then is all I saved, and it is the foundation of my current net worth. – RonJohn Dec 31 '20 at 18:24
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    I've rarely heard advice to max out your 401k. They usually say things like "as much as you can afford" and often "at least as much as your employer will match". If you're saving for something important, that goes into the affordability calculation. – Barmar Jan 01 '21 at 16:22
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    The power of compounding is the reason we're encouraged to save heavily when we're young, before we have lots of living expenses like families. – Barmar Jan 01 '21 at 16:24
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    @Barmar sure, "save heavily when we're young" is great, but it shouldn't all be in retirement plans. – RonJohn Jan 01 '21 at 16:25
  • True, although the power of tax-free compounding is also alluring. – Barmar Jan 01 '21 at 16:28
  • @Barmar no doubt. The consequence, though, is OP's question. – RonJohn Jan 01 '21 at 16:30
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Financial planning requires you to consider all your financial goals, and prioritize them. As it stands, you have defaulted to consider your retirement savings to be the #1 priority, but it is not clear that you have done that after careful analysis. It seems you have done that out of perhaps a fear of what retired life will look like for you.

Financial goals go beyond simply 'x financial milestones', but also quality of life determinations over the course of your whole life. Something to consider in that vein - are you going to spend 40 working years living in poor conditions, in order to have a 'champagne on the yacht' retirement?

A simple example to mull over - let's assume your current annual living expenses are $40k, after taxes. Simple rule of thumb is that a well-diversified but somewhat-risky investment portfolio grows enough that you can withdraw about 4% annually, forever, while still maintaining a stable balance that grows with inflation. In this example, you could draw your $40k of living expenses off of a balance of $1M. This means that if you find the philosopher's stone and live another 100 years after retirement starts, you could still do so if you retired once you hit $1M in investments.

If you do the math on your current investment rate until your intended date of retirement, you might find that on a 7% increasing investment value, you might hit retirement age with $2M in the bank. Meaning you are living on $40k / year while you're young, in order to retire at an $80k / year lifestyle.

What goals should be prioritized ahead of retirement savings? That is something you need to consider deeply. Start by building a current budget for yourself on how you live today, and think hard about what quality of life improvements you could make (including, in your case, a desire to buy your own home), and whether that would mean more for you than an extra $x allowance in retirement.

Grade 'Eh' Bacon
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  • Thanks for this. This is definitely psychological at this point and requires me to sit down and really prioritize stuff. Old habits die hard and all that. By my math I'll hit $1M by 45 so I think I should be fine based on the withdrawal rates (even assuming a 2% real growth) but the goal for 2021 should be to get out of the "But what about n + $1" thinking if that makes sense. – Michael A Jan 01 '21 at 03:37
  • @MichaelA It seems you are still putting the cart before the horse. Sit down and write out all your financial goals (commonly includes things like: annual vacations, cost of living improvements, rainy-day funds, education for self / children, house, car, wedding, retirement, 'semi'-retirement income reductions, charitable giving, assistance for parents as they retire, lakehouse, etc. etc. etc. etc.). If you don't actually sit down and literally write out what goals matter to you (and then begin to estimate what they cost), all you will have left to make decisions on yuor own priorities is gut. – Grade 'Eh' Bacon Jan 04 '21 at 21:09
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Two things stick out at me that I would consider adjusting:

  1. You are putting a very large percentage of income into retirement. You could easily lower that amount to provide some more "breathing" room. Another idea would be to switch some of the Roth to Traditional on either the 401k or the IRA which would reduce your taxes by approximately 22% of the amount you switch. You'd probably do better though to simply reduce the total contribution amount instead.
  2. A $300K home seems like a lot for $65K income. It sounds like you selected $300K because it's the median. But what's the median income in that area? Every location is different, but for example in my county the median income is $92K, and the median home value is $224K. Property taxes are pretty high in my county though, so that could make a significant difference in how much people can afford. Regardless, you may want to set your sights on a less expensive home initially. This has the additional benefit of not creating as big of a differential from how much you pay in rent now, vs how much your monthly out of pocket will be for home ownership.
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Get the details here, but the short version is you can withdraw the entirety of your contributions to a Roth IRA plus up to $10,000 in earnings, without paying any penalty or tax, in order to purchase your first home. So there is no conflict between those goals.

Adam Acosta
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  • "There is no conflict between those goals"...I think this is the answer. In addition to your Roth IRA, many 401(k) plans also have provisions to take a loan against the balance. Check with your plan administrator...in our company you can take as much as $50,000. And such a loan usually does not count as "debt" when applying for a mortgage, since it is technically your money. – Jeremy Dover Dec 31 '20 at 21:36
  • Thanks Adam, you're right. I'm familiar with Pub 590B (IRS publication that details the first time home buyer distribution benefit) but hence the question I'm still cautious about withdrawing anything from retirement at the moment – Michael A Jan 01 '21 at 03:38
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I'm about your age (34) and understand feeling the need to save as much as possible. I was maxing out my Roth IRA when I was making <$25k an year (grad school). Once I graduated and started making "real" money, I was saving probably 25%-30% of my gross income for about 3 or 4 years, although I never maxed out a 401(k). But a couple of years ago I started really thinking about what I really wanted. I like some aspects of FIRE, but I don't want to sacrifice all of "now" for it, especially since I mostly enjoy my work (indeed, I think my "ideal retirement" would still involve working part time). I got married, bought a house, and plan to start a family soon, so there's financial obligations that I had to address.

So I started looking at my account balances and some simple projections of their value at retirement and started to realize that I was actually in pretty good shape, even if I made conservative estimates. I reevaluated my savings and decided to keep maxing out the HSA but I dropped the 401(k) down to just get the full company match. I still add to the IRA and often max it out, but it isn't a huge priority. I'm now saving around just12-15%. And I feel ok with that because I already have a good foundation. I would feel very differently if I were just starting my savings journey.

Obviously, what level of savings that make you sleep at night is very personal, but you sound like you probably have more saved up that I ever did, and I have saved up much more than most at our age (not really a great indicator, of course). Look at what you have and what you want and reanalyze if what you're doing is getting you there. Personal finance isn't about running up the score before the end of the game (you can't take it with you, after all), but it's about being able to comfortably enjoy life the best you can.

And with regards to the house, this is going to sound sacrilegious, but you don't need to have 20% down. Yes, you'll have PMI costs that you'll have to factor in. You'll never get the money back that you spend on PMI, but the same is true on rent, or interest. We only put down about 7% on our home 3.5 years ago (again, not unlike you, we put a lot into the retirement) and had to pay PMI. For us, it was worth it. It wasn't that much more in the scheme of things, and since we went with a 15-year loan we were able to get it removed in 2.5 years. If we waited to save up 20%, we might still be saving and would have spent much more on rent than on PMI. The calculation will most assuredly be different for you (our house was just over $150k, not $300k, and PMI was ~$40/month, so basically an temporary extra 0.25% on the interest). But it's a calculation that you should look into doing.

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I think one thing to keep in mind is that saving is saving. One way to save money (in the sense of "put money into savings," not "spend less money") is to put it into retirement accounts. Another way is to put it into an ordinary savings account. Another way is to buy a house and make principal payments.

In other words, you should keep in mind that spending money on a house can still count as "saving for retirement," and so if you want to save for retirement, perhaps you should temporarily stop making retirement account contributions, buy a house, and then start making contributions again. That may be a more cost-effective way of saving for retirement than maxing out your contributions.

Tanner Swett
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The investment value (setting aside the personal value) of buying a home is to speculate on land appreciation with the help of a big subsidy from the federal government. The gov't will give an FHA loan or sponsor a 'conforming' mortgage for a far longer term (30 years) with a far lower down payment (3.5% or 5%) and with far more generous terms (a fixed rate, few covenants and no prepayment penalty) than could be obtained in a free market for mortgages. That said, home prices already include much of the benefit of this subsidy. You're betting that the land appreciates even further than it already has under this regime of subsidies.

Note that land appreciation is not guaranteed. In Cleveland, Chicago and Baltimore there hasn't been much appreciation. In Phoenix and Tampa there has been appreciation but with wild swings (a crash in 2007-2009).

If you are single, you could consider "house hacking." See BiggerPockets.com for their take on the duplex or boarding house investment strategy.

Orange Coast- reinstate Monica
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Everything is a tradeoff. I salute you for being so long-term-thinking with regards to your retirement (much more than myself at your age), but do keep in mind the one big "gotcha" with retirement savings:

It's largely inaccessible until late in your life.

In my mind, that means that it's basically a non-liquid asset -- even less than non-liquid assets like a home. This can present a problem if you have a substantial financial need between now and when the money becomes available (without a large penalty).

It is usually smart to have a mix of assets, from very liquid to very non-liquid, available during your life journey. Otherwise, your options how to deal with unexpected surprises during this journey are far more limited. (Google stuff on "asset rich cash poor" for various discussions.)

As a result, I would suggest you plan for the future as a whole (short-term, mid-term, and long-term) with your savings and excess income, rather than putting basically all your eggs in the long-term basket.

Two early pieces of advice I received and have found very valuable during my own journey were:

  • Always take advantage of any employer-matching 401K amount (as a minimum).
  • If you have the options for an ESPP (employee stock purchase plan) where the company gives a discount, think very hard about taking advantage of this as well.

Both give almost immediate significant returns, even if (in the ESPP case) you just turn around and sell the stock to put somewhere less ... exciting.

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There is no guarantee that your savings will have any value when you retire. Balance is important.

Inflation is rampant and with all the helicopter money from the covid fixes it will get even worse.

There is no guarantee that you will even live long enough to retire either.

I maxed out my savings plans but could have made much more by investing in higher return possibilities and paying the taxes.

I got most of my savings for retirement from selling my house vs my IRA/401K. Not sure if that would still work for you in this economy.

Better you save some but invest it where returns are far better than corporate 401Ks and most IRAs where the planners got rich and we got crumbs.

I suggest you forget material wealth and focus on what God wants you to do. The future after your retirement will be much longer and you need to save up for that time too.

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  • "Inflation is rampant" Sorry, if it wasn't clear from the context of the question, I'm in the US, where this isn't the case. Inflation has been historically low for decades despite QE and other stimulus. High inflation, let alone hyper inflation, isn't a serious concern in the US – Michael A Jan 02 '21 at 14:16
  • @MichaelA given the answer talks about IRA/401Ks, it seems to also be written from the context of the US. – GS - Apologise to Monica Jan 02 '21 at 16:10
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  • Consider marrying a wealthy woman, or, one with an income

  • "Where there's a will there's a way", if you can "somehow" find a way to get on the property ladder, you'll be a (n incredibly) rich man when you're older. Make it happen

  • Should you be moving to a cheaper city to get started?

  • Try to understand leverage https://money.stackexchange.com/a/127514/41786 Here's a way to turn 1.8 in to 500 in only a few decades:

https://money.stackexchange.com/a/133985/41786

My open offer, I will send 100 grand USD to anyone who can show me a realistic way to beat that. (Why wouldn't I?)

Fattie
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    I think this is supposed to be a joke answer but if it's not, I fully understand leverage and I'm not sure your single data point of SF over the past decades is universally applicable? – Michael A Dec 31 '20 at 01:42