Should I decrease my 401(k) contributions to be able to afford a more expensive mortgage?
I am 46 years old, and my wife and I make about $200,000 a year. We are ready to buy our first home. We live in New York where the cost of living is high and we're not willing to relocate just yet. We do not have kids and we live slightly below our means. We have about 10 months of emergency savings; however, some of that would be used towards a down payment. I max out my 401(k) contributions and I have approximately $140,000 in my retirement accounts. I understand that we should spend about 30-35 percent of our net pay on rent/mortgage, but would it be irresponsible of me to decrease my contributions to my 401(k) in order to afford a slightly higher mortgage? I would ensure that I still would continue to receive my employer's full contribution as well.
Do you have any additional debts (credit card, car loans, student loans, etc?) If so you are better off paying those debts off before you think about purchasing a home. But let's assume you're debt-free. You don't HAVE to have a mortgage that is 30-35% of your net pay. In fact, the goal eventually should be near 0% (paid off!) My opinion is that it would be more irresponsible to purchase a home with other debts, or purchasing more home than you can afford, than it would be to suspend 401(k) contributions for a short time to save up a larger down payment.
This is a complicated question and one many New Yorkers encounter due to the high cost of living and real estate.
It seems to me, with the information provided in your question, that you have to seriously consider whether or not you want to pull back your 401(k) contributions. The amount of money that you currently have saved for retirement, if that is a total view, seems to lead me to believe that you are behind where you should/need/want to be. It is very important that at your stage of life you have a plan in place to help guide you through the decision making process you are entering right now.
Prior to moving forward with a home purchase, I would engage a fiduciary advisor to help you develop a financial plan. the plan will show you whether you are ahead, behind or on target with your goals. Then you can project how lowering your retirement plan contributions, to afford a more expensive home, will impact things. You have to remember, although you have the ability to borrow to purchase a home, there is no loan for retirement.
Putting a plan in place will shed light on your overall situation and help guide you ffor many years to come. Good luck as you go through this process!
Congratulations on buying your first home! This is just one gal's opinion, but for your income and age, you are somewhat behind in savings. I encourage you to try your hardest to find a house you can afford without lowering your 401(k) contribution.
I love questions like this because they generate lots of questions in my own mind. You're asking for a black and white answer and you'll likely get some. I'm going to "think grey." At least for a moment.
First: what's the real estate market like where you are buying? In other words, if you are buying $1,000,000 home, are you expecting it to increase in value? And, if so, how much will it go up in a year? And, if you are renting, how much has your - will your - rent increase each year? Here's why I'm asking: if you are buying a home that is going to increase value, your "total net worth" could increase significantly. And, if your rent is increasing, you could be paying more out-of-pocket for your housing without adding to your total-net-worth. In other words: look at your 401(k) as one piece - albeit an important piece - of your balance sheet. Real estate, collectibles, precious metals - these too, make up your net worth and will likely contribute to your retirement.
Second: if you reduced your 401(k) contribution, how much would it be and for how long? Let's say, for example, that your $1MM home increased by 10% over the next two years (so that is now worth $1.1MM). You've added $100K to your net worth. If you and your wife both reduced your 401(k) contribution by 1%/year for two years and in doing so, you lost the employer match (of another 1%) you would be reducing your total benefit (EE/ER) by $8000 over a two year period.
Granted: this is back of napkin math, but if you are asking, "Should we reduce our total 401(k) contribution, including employer match, by $4000 per year for two years to obtain a $100,000 increase in our total net worth?" then I think the answer is clear.
You do not seem irresponsible based on the summary you provided. A guide of 30-35% of net income toward your mortgage payment is a reasonable guide, but I understand you wanting to exceed the guideline due to the high cost of housing in NY. The fact that you are questioning this strategy tells me that the higher housing costs might make you feel uncomfortable. Here is plan of attack: First, get pre-qualified for a mortgage to see how much they are willing to lend you. This will be a good indication of your ability to afford the house price you have in mind. However, keep in mind that just because a lender will loan you the money, it doesn’t mean that the payments will fit into your personal budget. Take the time to assess your total family cash flow before taking the plunge. As this will be your first home, I think that adding real estate to your portfolio of assets is a good step toward creating a diversified portfolio; just be sure to maintain positive cash flow to avoid a stressful situation.