Stopping contributions to IRA/401k to save for downpayment?

Submitted by badboyzpwns t3_z7ft6z in personalfinance

Hey all,

I am following the subreddit's chart and it looks like it advocates to aggresivley save up for a downpayment rather than contributing to your non-taxable accounts:

https://www.reddit.com/r/personalfinance/comments/4gdlu9/how_to_prioritize_spending_your_money_a_flowchart/

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I usually max my non-taxable accoutns so it feels realy weird not to do so. Are there any caveats to taking the approach above? is it 'better'? I was thinking of maxing out non taxable accoutns while also saving for downpayment too, but that would slow things down for the down payment.

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SweetPotatoGut t1_iy6d8px wrote

I think that chart forgets about 401ks without an employer match. It can’t possibly be suggesting people forgo a 401k.

At some point, it may make sense to reduce your tax deferred retirement contributions in favor of saving for a house, but I wouldn’t think it often makes sense to forgo retirement contributions all together. It’s really important to accumulate money in those account early in your career.

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badboyzpwns OP t1_iy6fiv8 wrote

Ah I see! so the ideal approach would be to make sure to get full benefits of 401k matching, than you can forget about the rest of IRA/401K contributions for the time being and save aggresivley for downpayment?

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SweetPotatoGut t1_iy6gy08 wrote

It will depend on your situation. I personally still don’t love that and would advise people to reduce, rather than stop, their tax deferred contributions. Not only because of its effect on your retirement, but also because you’ll pay more in taxes since you won’t be reducing your agi w tax deferred contributions.

But again, it will vary by person/situation.

I feel for you. I’m fortunate to make a lot of money but I have student loans and live in a HCOL area. It’s very hard to save for a home considering how expensive r they are and the rate you’ll pay.

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badboyzpwns OP t1_iy6lvbd wrote

Yes! the chart actualy did not say to stop contribution. but to reduce it to 15%. I am still figuring out why 15% is enough for retirement though haha.

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Thank you for your insight regardless! I can relate haha, best of luck!!

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shhoooop t1_iy6exc9 wrote

According to the PF flow chart, saving for a house is at the end (of the chart). Not before saving for retirement.

https://imgur.com/CcEVQAV

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badboyzpwns OP t1_iy6gbgx wrote

Thanks! Oh I do see it now, it says to save 15% for your 401k, why 15%? Does this also apply for IRA?

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Werewolfdad t1_iy6h17a wrote

15% will ensure you have enough to retire

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badboyzpwns OP t1_iy6hcy5 wrote

Thanks!

However, that 15% can differ depending on your salary For example, if i make 40k vs 150k.

What justifies that 15% is a good enough number? I am following the trinity rule for 40k withdrawal in your retirement years and i am curious where 15% comes into play

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dslpharmer t1_iy6ihee wrote

That 15% assumes that your quality of life in retirement won’t plummet and that you may even spend more if you’re traveling and taking up expensive hobbies.

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MrBalll t1_iy6jecn wrote

>This. If you only make 40k a year you live off that and that is what you are used to. So no matter what you make per year, you will be comfortable living off the 15% contributed once you reach retirement.

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badboyzpwns OP t1_iy6ljyi wrote

Thanks! That makes sense, but why is the number 15%? Is it based on a study like the trinity study? For example, contributing 15% of 40k salary vs 15% of 150k salary, will yield signficiantly different results!

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MikeWPhilly t1_iy6v8ju wrote

You seem to be missing that somebody with $150k salary probably spends more day to day than $40k. Generally speaking the goal is to have the same, or better, lifestyle in retirement.

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dslpharmer t1_iy7o3up wrote

Has to do with percent of income replaced at retirement with savings, projected spending, and growth assumptions. Fidelity has an article that says the modeled it over $50,000-300,000 per year salary. This is for replacing approximately 45% of income with savings. If I retired today, SS would replace 26% of income.

Most importantly, the general rule is when you make more, you spend more. Car, convenience, house, clothes, food, entertainment, kid activities, vacations, etc. Some of that may diminish when you retire, but to replace a big chunk of income, you want big savings.

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badboyzpwns OP t1_iy9jm3r wrote

Thanks! I saw the fidelity article now and it make sense!

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Werewolfdad t1_iy6iqgh wrote

Pretty sure the 15% was based on the Trinity study

> However, that 15% can differ depending on your salary For example, if i make 40k vs 150k.

Don’t understand what this means. 15% is 15%

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badboyzpwns OP t1_iy6lfra wrote

Sorry! what I meant was, contributing 15% of 40k salary vs 15% of 150k salary, will yield signficiantly different results! So why 15%?

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Leading-Hat7789 t1_iy7m0oi wrote

There are always exceptions to the rule, but this flow chart is almost always the best decision.

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Bizness_boi t1_iy6vwv5 wrote

You should always hit your 401k match, but I don't think maxing your retirement accounts is the smartest play in the world when you're younger and still getting your life together. What good is a pile of cash at the end of your road if you did nothing but save money and live in crappy apartments and eat ramen noodles? Saving for a down payment is a fine option.

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ChiSquare1963 t1_iy6ezv6 wrote

If you have an employer match, you should contribute enough to get the match. If you plan to do 20% down, plan to buy a house with payments under 30% of income, and expect to live in that house for more than five years, it’s okay to drop retirement contributions to match level for a couple of years. Just be sure you re-set to at least 15% of income as soon as you have downpayment & closing costs saved.

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badboyzpwns OP t1_iy6h1s7 wrote

Thank you! I actually saw in the chart that regardless should put in 15% of your income to your 401k - i'm not sure if it's applicable for IRA. This should be done before maxing your 401K/IRA or saving for a downpayment. Why 15%?

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ChiSquare1963 t1_iy72zch wrote

People who consistently invest 15% of income are able to retire in 60s and maintain their standard of living. That 15% can be invested in any retirement account (401k, IRA, 403b, etc). The 401k is the most common, allows you to invest more than IRA each year, and is funded through payroll deduction so you don’t have to remember to transfer funds, so most people recommend funding the 401k first.

If you invest less than 15% for a couple of years, you’ll likely need to invest a little more than 15% later. Ideally, you stick with 15%, but some people need to adjust percentage to save downpayment in a reasonable time period.

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Wozzy91 t1_iy6zhd0 wrote

Check if your 401k plan offers loans and if they do, home purchase loans with more favorable terms. This allows you to continue maxing your retirement accounts but also gives you an avenue to contribute towards a down payment at the same time.

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