Should You Pause 401(k) Contributions to Buy a Home?
Buying a new home is a significant financial undertaking, but is it worth potentially hindering your retirement savings? This is the question a high-income earner recently considered. Many Americans are tempted to pause their retirement contributions to afford a down payment or a larger mortgage.
Weldon's Dilemma: A Case Study
Weldon, a 30-year-old living in a high-cost area, is contemplating temporarily pausing his 401(k) contributions to make homeownership more affordable. Despite knowing the risks, he is tempted by his employer's generous contribution plan. His employer contributes 15% of his salary to his 401(k), meaning even if he pauses his own contributions, a substantial amount will still be saved.
“I know it sounds dumb, but my work actually puts 15% of my pay into my 401(k) instead of a matching program,” he said. “I normally max out my contributions, but if I stopped paying in, there would still be $50,000 to $55,000 contributed to my 401(k) next year [1].”
His anticipated mortgage payments, ranging from $3,000 to $4,000 per month [2], necessitate careful budgeting. By pausing his $2,000 monthly 401(k) contributions, he hopes to manage the mortgage and resume contributions later.
The Trade-Off: Short-Term Gain vs. Long-Term Loss
While a home is an investment, pausing retirement contributions comes with a significant opportunity cost. Weldon, who earns approximately $330,000 annually and maxes out his contributions at $23,000, reaching the IRS total annual 401(k) limit of $70,000 [3], would free up $23,000 per year by pausing his contributions. This could ease the strain of mortgage payments in a high-cost market.
However, skipping the maximum $23,000 contribution for 10 years, assuming an 8% growth rate, could result in missing out on $361,000 in his 401(k) [4]. Over 20 to 30 years, the potential losses become even more substantial.
Even a single $23,000 investment compounded at 6 percent over 30 years equals $132,100 with no additional contributions. The $361,000 he could have invested would multiply to $2,073,400 in 30 years, enough for a comfortable retirement without counting on selling his home.
Questions to Ask Yourself Before Pausing Contributions
If you're considering a similar decision, carefully evaluate the following:
- How long will the pause last? A short pause might be manageable, but the longer the delay, the harder it is to catch up.
- What happens if you lose your job? Job loss could jeopardize both your retirement savings and your ability to afford the mortgage.
- What do your savings look like? Evaluate your emergency fund and existing investments outside of retirement.
- Will the home stretch your budget permanently? If affording the mortgage requires consistently skipping retirement contributions, consider a more affordable home.
If the only way you can afford a home is not to save for retirement, then you either can't afford the home, or you can't afford to retire. Which would you rather sacrifice?
Conclusion: Balancing Homeownership and Retirement
While Weldon's situation is unique due to his employer's contributions, pausing retirement savings carries risks. Ensure your financial plan prioritizes long-term goals, balancing homeownership with a secure retirement. Don't let the dream of owning a home derail your retirement planning.
| Consideration | Details |
|---|---|
| Pause Duration | The shorter, the better for long-term retirement goals. |
| Job Security | Loss of income could jeopardize both home and retirement savings. |
| Existing Savings | Adequate emergency and investment funds mitigate risk. |
| Affordability | Mortgage payments should be manageable without sacrificing retirement. |
Disclaimer: This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
