I see this question come up a lot from recent college graduates. After you contribute enough to get the employer match in the 401k or 403b plan, should you save more for retirement, or should you save for a house down payment?
The question is asked presumably because the income does not allow one to do both and therefore one has to choose one or the other.
The answer is simple: save more for retirement.
The reason is also simple. Saving more for retirement is investing in one’s future. Saving for a house down payment is saving for increasing consumption in the near term. If someone hasn’t saved enough for retirement yet, he/she hasn’t earned the right to buy a house yet.
It’ll be clearer if we change the question: save more for retirement or buy a new sports car? If one hasn’t saved enough for retirement yet, one is basically using retirement money to buy a new sports car. Sensible people will see one should save more for retirement before buying a new sports car. There’s nothing wrong with buying a new sports car, but not at the cost of saving more for retirement.
Why does buying a house feel differently than buying a new sports car? Both are an upgrade in current consumption: a new sports car is better than a five-year-old sedan; a house is better than a rented apartment.
A house appreciates! Maybe. Now we know it can also depreciate, wiping out your down payment. You get tax deductions! Maybe, but you also pay interest and property taxes. The interest and property taxes may be higher than your rent.
If someone can’t save enough for retirement yet, don’t worry about buying a house. How much is saving enough for retirement? 6% of income isn’t nearly enough. Try at least 20% of gross income. Kimberly Palmer in her book for young adults Generation Earn recommends saving 25% to one-third of one’s pretax income. That includes both saving for retirement and saving for near-term goals such as a house down payment. I agree with that recommendation but saving for retirement has to come first.