Dear MarketWatch,
My spouse and I are in our 50s and live in very nice housing provided by his job. We were late to saving as we both worked for nonprofits and teaching jobs for many years, and have two special-needs children. We have no debt.
We are now both making relatively decent money and are saving aggressively for retirement — maxing out 401(k) and 403(b) contributions to the tune of $30,000 each per year, putting in the most allowed into our Roth IRAs, adding funds to our investment accounts handled by our financial adviser.
In all, we are saving a little over 40% of our income each year, and sometimes as much as 50%.
We have one child in college, but 529 funds cover the expenses. We have a second child in a privately-paid special-education school for the next three years, which is our largest expense.
We aren’t completely sure where we will want to live when we retire in the next 15 or so years, but we will need to live somewhere!
Would it be wise to continue to sock away cash into retirement funds and investments — with the plan of figuring out where to live (buy or rent) when we retire? Or should we try to buy now, since housing will never get cheaper?
Two side points: 1) We could not afford to buy in the area where we work so anything we buy would be a vacation home somewhere else. 2) We were landlords once and do not have the stomach for it, so buying something and renting it out is not in the cards.
Thank you for any perspective you can give!
Living Free for Now
See: Reverse mortgage, sell the house or Medicaid? How can my parents pay for long-term care?
Have a question about your own retirement savings? Email us at HelpMeRetire@marketwatch.com
Dear Reader,
You have multiple advantages here: the first is time, since you seem to have a lot of it to make your decisions, the second is motivation to be financially secure for your retirement, and the third is free, high-quality housing, which frees up your incomes for other big expenses like education and planning for the future.
Many people are unable to save a lot for retirement in their younger years, and it takes a lot of work to prioritize that when the funds finally become available.
Although you do have time on your side, and as wonderful it is that you are stashing as much as you can into retirement accounts, it is important to have savings outside of those accounts.
“You can always borrow for a home purchase, or an education, but not for your retirement, so don’t give up those lofty retirement contributions completely. ”
You never know what could happen, and you may find that you need to move before those 15 years are up. Retirement accounts have rules to them, including requiring you be 59 ½ years old to withdraw, so you don’t want to be up against potential penalties in a time of (possible) hurry.
For a short-term goal, an investment account would work, but be very careful with your asset allocation. You want that money to grow, but you also don’t want the portfolio to be too risky as that could deteriorate your savings in the event of a downturn. If you do plan to buy a home before the 15 years are up, be conservative.
You also need enough liquid assets on hand for an emergency savings account. This is not for a home, retirement, a vacation, education or anything else. This is simply to help you if a crisis calls. Advisers suggest three to six months’ worth of living expenses, but I always like to err on the side of heftier accounts. You really never know.
To your question — to buy now or wait? Don’t rush it. Houses are a very large purchase, and if you don’t find anything you absolutely love but you buy it anyway, you’ll probably live to regret it.
Also, house prices themselves may go up over the long-term, but interest rates are still pretty high these days, so unless you’re planning to buy it outright, you’d have a mortgage over your head. Even if you can afford it, is it worth it to you if you don’t need it just yet and it’s not a dream home? Probably not.
Be realistic about your expectations
Run a few calculations now. First: How much do you actually need for retirement? Get realistic about your expectations in retirement, including how much you want to spend on housing, education, lifestyle and, of course, healthcare (expect to spend more than you think there). Then figure out how much you need to save to get there. This is what I wrote to another reader about how to tackle those numbers.
Do something similar with your home goals. What is the maximum you want to spend? How much do you need for a down payment? How much more do you need to save to get there? You can’t afford to buy where you are right now — but if you save over the next five to 10 years, you might.
“What is the maximum you want to spend? How much do you need for a down payment? How much more do you need to save to get there? ”
Based on what you find with those calculations, decide how to split those contributions for your savings goals. You can always borrow for a home purchase, or an education, but not for your retirement, so don’t give up those lofty retirement contributions completely.
Look around for where you might want to live when you do eventually retire. List all your “wants” and “needs” in a home and neighborhood, and draw out on a map where you want to look.
Keep an eye on the real-estate market. How much are the homes going for? What would you need to save for a sizable down payment? What size mortgage would that leave you with, and what additional expenses would you have with that house — utilities, lawn care, taxes, fees for home associations or local club memberships?
If you go on sites like Zillow
Z,
Realtor and Redfin
RDFN,
you can see what houses sold for in recent years. That gives you an idea of how much home values have increased and what you can expect to spend. If you do this for the next few years, you will be one of the most well-informed buyers in that market — and that’s an incredible position to be in.
Have a question about your own retirement savings? Email us at HelpMeRetire@marketwatch.com