Should I Save for a House Down Payment or Retirement?

Two of life’s biggest milestones — buying your first home and retiring from your career — generally require a lot of planning, budgeting and saving money. Depending on where you are with your life, one could seem far more important than the other. So should you save for a house or for retirement? We’ll break down some of the most common reasons people choose one or the other.

Can I Save for a Mortgage Down Payment and Retirement?

Saving for both a house and your retirement at the same time is a totally viable option, it just requires more careful financial planning than if you picked only one. You may feel like you need to choose between maxing out your 401k or saving for a down payment, but you can put money into both over time. If you absolutely have to choose, however, go for the retirement savings. It’s better to be financially comfortable in retirement, when you have limited opportunities to grow your wealth, than it is to be a homeowner.

Saving for a Home

So why do some people choose to save for a home instead of retirement? Well, for many people, retirement feels far away while saving for a home seems much more immediately available. You might also be tired of paying rent or want to build equity in a mortgage, both great reasons to focus on saving for a house.

What happens if I choose to invest in a down payment?

Let’s say you’ve got $10,000 in savings for a down payment on a $200,000 house. According to Millionacres, since 1940, homes have risen in value an average of 1.5 percent per year. Keeping this figure in mind, your down payment would be worth about $11,605 over 10 years, while your house would be worth about $232,108.

Saving for Retirement

If you don’t mind renting and want to see a higher return on your investment, focusing on retirement savings is a good option. Often, this is as simple as signing up for the 401k investment program at work and contributing a set amount from each paycheck — an amount sometimes matched by your employer. You could also meet with an accountant and set up an Individual Retirement Account or IRA, which is a type of retirement account where your contributions are tax-deductible but are limited annually and can’t be withdrawn until age 59 ½ without paying a tax penalty.

What happens if I choose to save for retirement?

Putting your money into a 401k or IRA instead of investing in a home is a great way to see larger returns on your investment. According to Millionacres, the average annual return from stocks over time is about 7 percent. That same $10,000 over 10 years could come out to about $19,672. Add several more decades, and you can see how retirement investments outpace real estate.

The biggest difference between retirement savings investments and buying a home is that the money you invest in a home goes into material goods, which you may not see a return on for many, many years — or not at all. But, you’ll also be building equity and strengthening your credit score by making your mortgage payments on time. Retirement investment funds are simply money and not tied up in anything as complicated as a house and will help set up your post-career life to be as comfortable as possible.

Your Next Steps for Smart Saving

So how can you get started saving for a new home or your retirement? We’ve got money-saving tips for all stages of life, from budget hacks to investment techniques. If you're ready to buy your first home, make sure you connect with your American Family Insurance agent to learn about homeowners insurance and how it can help protect what matters most.