Invest In A 401k Or Save For A Downpayment? Both Are Good Options

Over the years, many people have inquired whether they should invest in a 401k or save for a downpayment. A home, after all, is usually the most expensive asset someone will buy in their lifetimes.

Coming up with the downpayment is one of the biggest financial hurdles anybody can overcome. Furthermore, nobody wants to remain in a rental if they know they plan to live in an area for an extended period of time e.g. five years or more.

Due to the difficulty of coming up with a downpayment for a home, more people have resorted to using The Bank Of Mom And Dad for funds. However, not everybody has wealthy or generous parents.

I’ll share with you my framework on how to figure out whether to invest or save for a downpayment. We’ll also talk through the decision process of deciding how much to invest in a pre-tax investment account like a 401k.

The 401k has early withdrawal penalties before age 59.5 to be aware of. We'll also talk about whether to invest in an after-tax digital wealth advisor like Empower where you can easily get liquid without any penalties to buy your home.

Invest In A 401k Or Save For A Downpayment?

The key thing to realize is that investing in the stock market and saving for a downpayment aren't mutually exclusive. You can save for a downpayment by investing in the stock market.

As you get closer to the time you want to buy, you can dial down your risk. In fact, here's a great post discussing how you should invest your down payment if you are planning to buy a house within various time frames.

Let's first go through a mental framework about deciding where to allocate your savings.

Step 1: Answer The Why

The first thing everybody needs to answer is WHY they are making and investing their money. What is the purpose of working, saving, and investing? Hopefully the why goes beyond basic survival needs.

My #1 goal for making money since entering the workforce full-time in 1999 was to fill the Financial Freedom Bank with as much riches as possible. Work was rough for the first 10 years after college, and I wanted to do something entrepreneurial as soon as I had enough money to break free.

Step 2: Decide Which Is Better

Make a decision whether owning a liquid portfolio of stocks and bonds is more valuable to you than owning a place of your own. While you're deciding between the two, you should also do your best to find your passion as quickly as possible. 

From the age of 22 – 26, I preferred building my investment portfolio because I knew I wasn’t going to be able to last in Manhattan for five years. I had to get out ASAP. It was important my wealth was independent of geographic location. After 10 cold winters on the East Coast having also gone to high school and college in Virginia, I had to go west!

For many new graduates starting out, it’s highly unlikely the first job you take will be the last job you'll ever have. Very few are so lucky, or so unadventurous as to stay in one place forever. Consequently, I advise trying to save and invest as much money as possible in your 401k and after-tax brokerage accounts first.

Step 3: Mobilize Your Capital

After growing my investment portfolio to about $250,000, I started feeling this emptiness for work inside. I escaped Manhattan for a new job in San Francisco, but just three months later 911 happened. Working in finance didn’t feel meaningful anymore.

Seeing the investment account grow wasn’t motivating either because the portfolio provided little utility. Due to the volatility post dotcom burst and terrorist attack, I wanted to convert funny money into a real asset.

Because of my investment portfolio’s lack of utility, and because I, at the age of 25, no longer wanted to live in a cramped one bedroom apartment with my girlfriend next to an alcoholic neighbor, who would blare the bass all evening, I decided to put $120,000 down on a $580,000 2/2 place that overlooks a park in Pacific Heights.

As soon as I got the keys (and the first mortgage payment), my motivation to work shot through the roof. Finally, I was deriving some utility from the money I was making and saving: a nicer place to live! Having a better lifestyle was my main goal for having more money.

I liked living in my own place so much that two years later, I bought and moved into a new place. During the times between real estate purchases, I continued to invest all my savings based on my recommended stock and bond split.

Contribute To 401(k) Or Save For A Downpayment?

Deciding on whether to contribute to a 401k or create a Downpayment Fund through an after-tax digital wealth advisor or online brokerage all depends on your income, timing, and liquidity needs. In general, it's always best to be as liquid as possible. However, you don't want to not take advantage of free money. 

If You Can Afford To Max Out

For those of you who make more than $50,000 a year per person, I strongly encourage all of you to max out your 401k, whether there is a company match or not, and then try and save/invest an additional 20% of your after tax income. The more you can save the better obviously. 

For those making $70,000+ income, there should be no excuses for not maxing out your 401K. For 2023, the max limit is $22,500. The limit will likely continue to go up by $500 every two years.

You not only allow your investments to grow tax deferred in your 401k, you will also wake up years from now with a investment portfolio larger than you could have imagined because people are generally very undisciplined when it comes to money.

It’s the old “where did my cash go” a day after withdrawing money from the ATM machine phenomena. By automatically contributing to your 401k per pay check, your base case scenario is likely at least a $180,000 401k portfolio in 10 years. You learn to live with the income you have. Below is a chart of what you could have in you 401k if you saved diligently.

401k savings targets by age - Invest In A 401k Or Save For A Downpayment

If You Cannot Afford to Max Out You 401k

For those of you who make less than $70,000 a year per person, I strongly recommend contributing at least to the employer 401k match. For example, if you make $40,000 a year and the employer matches up to 3% of your base salary, contribute at least $1,200 a year so that each year, you’re adding at least $2400 to your 401k. 

You always want to take advantage of a sure thing. If you value having an investment portfolio more than buying a home, then feel free to contribute more than the employer match.

For those who value buying a home over building an investment portfolio, or can see themselves valuing a home over an investment portfolio in several years time, then all disposable income after contributing to your 401k match should go to an after-tax investment account based on a stock and bond allocation framework.

Convert Risk Into Lower Risk Investments

The farther away you are from purchasing your home, the stronger you should stick with the asset allocation framework. Once you are within one year of purchase, I would shift your downpayment money to a 50/50 equities/fixed income split at most.

Please note that bond ETFs like IEF and TLT do well during a stock market downturn. The closer you get to actually buying a property, the more you should consider converting your downpayment money to 100% cash. Given you will continue to save and invest each month, you should theoretically be always boosting your savings.

Deciding when to de-risk your downpayment investment money is an individual choice that depends on your risk tolerance, investing ability, and income stream.

One good rule of thumb I use is the 10% rule. If your annual after tax savings can easily make up for a 10% decline in your downpayment investment portfolio then you probably can afford to keep allocating based on your preferred asset allocation.

Related: To Get Rich: Turn Funny Money Into Real Assets

Run The Worst Case Scenario

If you end up needing to raid your 401k for a downpayment, then you can borrow up to $50,000 or half the value of your 401k, whichever is less, at a higher interest rate than a mortgage. Just know that you have to pay back the loan within 5 years or within 60-90 days if you leave your company. Worst case, you can completely liquidate your 401k for a tax and 10% penalty if you are under 59.5.

I think only petulant fools borrow from their 401ks. Have the discipline to want less, or buy a home only after you can comfortably come up with a 20% downpayment. Remember that the downpayment is only one expense. Don't forget property taxes, maintenance expenses, and your mortgage as well.

Invest In A 401k Or Save For A Downpayment Summary

  • Build as large of a savings/investment portfolio as possible via your 401k and after-tax investment accounts through automatic investment contributions. You don’t want to be tied down with an illiquid asset like a house early in your career because chances are very high you'll have a new job in a new location in your 20s.
  • Only after you’ve found a place where you can envision yourself living for at least five years, is it time to aggressively shift savings towards after-tax investments for your downpayment. The ideal scenario is if you can max out your 401k while saving as much as possible after taxes and 401k contribution.
  • If money is tight, at least contribute up to your company’s 401k match. Never say no to free money.
  • Once you are within one year of accumulating enough to buy a home, convert the asset allocation to at most a 50% equities allocation. Within a year, you should convert your entire downpayment investment fund into predictable cash while continuing to save new money every month.
  • Don’t use 100% of your entire liquid assets toward the downpayment. You need to have a buffer in case things go terribly wrong after purchasing the house e.g. job loss, investment loss, medical emergency, etc. Come up with a 20% downpayment and have at least a 5% cash buffer e.g. $100,000 downpayment on a $500,000 house and at least $25,000 cash buffer. 
  • Be strategic in how you invest your downpayment once you've built up a large enough some. After all, you don't want to lose your downpayment before finding that perfect house.

Explore New Real Estate Opportunites

During your saving and investing journey, always be mindful of your WHY. Knowing your WHY will make delaying gratification and choosing between investing or buying a home easier. Instead of seeing the process of saving and investing as a sacrifice, treat saving and investing like a game. 

Remember, investing in your 401(k) and in real estate is not mutually exclusive. Today, you can invest in real estate through real estate crowdfunding platforms like Fundrise and CrowdStreet. Both platforms are free to sign up and explore.

Instead if coming up with a downpayment and taking out a large mortgage to go all-in on a house, you can invest in real estate more surgically.

Fundrise has private funds that give you broad-based real estate exposure where you only need $10 to start investing. This is one of the easiest ways to invest in real estate with less volatility. Fundrise manages over $3.3 billion and has over 400,000 investors.

CrowdStreet has specific commercial real estate projects focused in 18-hour, faster-growing cities. This is a smart way to invest in cities that could be the next San Francisco. If you are an accredited investor, you can build your own select real estate portfolio with Crowdstreet.

Both platforms are free to sign up and explore. I've personally invested $954,000 in 17 commercial real estate projects across the country because I want to earn 100% passive income, don't want to manage rental properties as a father to two young kids, and I believe in the demographic trend towards lower cost, less densely populated areas of the country.

Financial Samurai Real Estate Crowdfunding Dashboard

Invest In Private Growth Companies

Finally, consider diversifying into private growth companies through an open venture capital fund. Companies are staying private for longer, as a result, more gains are accruing to private company investors. Finding the next Google or Apple before going public can be a life-changing investment. 

Check out the Innovation Fund, which invests in the following five sectors:

  • Artificial Intelligence & Machine Learning
  • Modern Data Infrastructure
  • Development Operations (DevOps)
  • Financial Technology (FinTech)
  • Real Estate & Property Technology (PropTech)

Roughly 35% of the Innovation Fund is invested in artificial intelligence, which I'm extremely bullish about. In 20 years, I don't want my kids wondering why I didn't invest in AI or work in AI!

The investment minimum is also only $10. Most venture capital funds have a $250,000+ minimum. In addition, you can see what the Innovation Fund is holding before deciding to invest and how much. Traditional venture capital funds require capital commitment first and then hope the general partners will find great investments.

Stay On Top Of Your Finances

As you invest in your 401(k) and try and save up for a downpayment to buy a house, it is vital to stay on top of your finances.

To do so, I recommend signing up with Empower. They are a free online platform which aggregates all your financial accounts in one place so you can see where you can optimize your money.

A great feature is their 401k Fee Analyzer, which runs your investment portfolio(s) through its software in a click of a button to see what you are paying. I found out I was paying $1,700 a year in portfolio fees I had no idea I was hemorrhaging!

There is no better financial tool online that has helped me more to achieve financial freedom. It only takes a minute to sign up.

Retirement Planner Personal Capital
Is your retirement on track? Check with Empower's Retirement Planner

68 thoughts on “Invest In A 401k Or Save For A Downpayment? Both Are Good Options”

  1. Sam, from an actuarial and predictive vantage point I’d like to see an article comparing the cost of home ownership vs saving for retirement. A comparison between the two would really lay bare the actual cost of buying and maintaining a home vs putting your money into the market and calculating returns (factoring in renting). I know it’s not an exact science and certain markets are anomalies (ie SF & NYC). Thanks.

  2. Thank you Sam for this great article. I really need all of the help I can get. I am 51, and my husband is 55. We are essentially starting over due to a racial firing of my husband and a group of his co-workers 6 years ago. No severance was given to the terminated employees nor was about $2,000 of the already earned pay paid to my husband. We started seeing the light at the end of the tunnel last year. I finally have a job now where the pay is fair. We have no college money for our 13 year old daughter. My parents have been putting money into a college fund for her. Charles, husband, has been putting about 6% into his 401K for a few years. I will be able to sign up for 401K this July. However, we are not getting any younger and have been renting since we lost our house and vehicles in 2011. If we get a 30 year loan, we may not even be alive to pay it off. At the same time, we need to grow our 401K. What would you do this late in the game if you were us?

  3. Financial Samurai, Help!

    My companies 457(b) has poor investment choices. There is an admin fee of 1.05% on top of the fund fees which are ~0.80% for a target date fund. There is no international fund for less than 1.00%. The cheapest small cap fund is over 1.00%. Average total fees are either right below or right at 2%.

    Since the robo-advisor I use as my taxable account includes tax-loss harvesting as an option should I only contribute the minimum to get the match, then max out the IRA (I’m eligible for the deduction), then go full force in the taxable account with the tax-loss harvesting?

    Historically I know the tax-advantaged status of workplace retirements (401k’s, 457b’s, etc) helped with grow due to their tax-deferred nature, but with tax-loss harvesting on one hand and high fees on the other it does bring up a new scenario. Contribute as much to the taxable as possible and let the tax-loss harvesting help in reducing the capital gains liabilities.

    1. 457(b) up to the match
    2. Full IRA contribution
    3. Brokerage with tax-loss harvesting

    What do you think of this plan? Thanks in advance.

  4. When you say 50k per person, do you mean that if I have a family of 5 that I wait until I bring in 250k/year to max out?

    Or is it per wage earning individual. Both of us have six figure incomes.

    I noticed in your article on how a family with 200k budget may not feel rich, that example only had one earner machine the 401 though there were two earners.

  5. PatientWealthBuilder

    I ended up getting lucky on the first house I bought for $130K and sold for $180K in two years. But this is rare and I would actually have been better off to rent for less and invest the rest because I would have developed better habits and I pretty much blew the $50K on getting married, the honeymoon, etc. It was so fun! I think investing in real estate if you can get it no money down makes sense but I think stocks for the long-term are the way to go…

  6. Hi Sam,

    A bit off subject but interested if you’ve ever written on it – have you ever compared 401ks vs Roth 401ks? Maxing out my 401k this year but thinking that if I started putting into a Roth 401k I would be able to actually invest more as $18,000 invested in Roth 401k is equivalent to over $22,000+ in pre-tax dollars depending on income tax bracket.

  7. I agree with this so much Sam! I think the best decision would be to max out your tax free accounts first and to start working on the investment portfolio. Once those are maxed out, I think that’s when its time to invest in properties as that is the next best way to shelter from taxes.

    I don’t know if this is the case in the US but here in Canada, we can withdraw from our RRSP to purchase our first home, so it would make even more sense to contribute there first.

    As for delaying gratification, well I still live with my parents instead of rushing into renting a place that would bleed my net-worth. I’m sure I can wait a few more years to save up a nice downpayment for a really nice property.

  8. In Australia we are lucky that our Superannuation accounts have a $30,000 max pre tax contribution ($35k for over 50’s). It makes it harder to max out but also means it can grow faster. And of course you get the tax savings.

  9. “I strongly encourage all of you to max out your 401k, whether there is a company match or not, and then try and save/invest an additional 20% of your after tax income”

    I am maxing out my 401k. From the after tax money, I am investing in Roth IRA ($4800) and 529 ($4200) accounts. Should I consider Roth IRA and 529 in the 20% that you recommend or not? After investing in these two, I am not able to save much (roughly 10% after tax income) :(

    1. Your Roth IRA and 529 accounts certainly count toward additional savings, 20% or otherwise. And congratulations for thinking about college expenses now. Both accounts are (or should be) unrelated to any savings for a house downpayment, though.

  10. lifetimeandmoney

    Great article, thanks! A friend of mine was asking the same question recently, considering she knew someone who did so well from the recent real estate boom over the past several year.

    I’m sure your real estate investments over the past years are better off in the long run than that money would have been in the 401k as well, however it seems that timing is not always the case (i.e., hard to predict when real estate returns will outweigh the tax benefits of a 401k)…

  11. I’m sort of at a crossroad where I need to make a decision regarding my financial future/retirement. Pretty stressed about all of this to be honest. Long story short, I went back to school in my mid-twenties for a degree in IT. The last few years since college I’ve been working my way toward my goal of a six figure income (not quite there yet, I’m only making 60k). I feel pretty burnt out from this field even after doing it for only a few years. I don’t really like it, but it pays the bills. I often think about starting my own business to get out of it and do something I enjoy more, but that’s not so easy with a family and the responsibilities that come with a wife and kids.

    I’m 32 now. I have NO retirement plan, which I feel horrible about btw. I’m starting a 401k with my current company and plan on putting in the max they will match. My wife who is about 10 years into her career recently put in her resignation to stay at home with the kids until they are in school. We are now putting the purchase of our first home on hold since we will be losing an income.

    Anyway, I recently I had a job offer with the Civil Service that I need to make a decision about. The salary would be equal to my pay now, the potential to move up and earn more would NOT be so great, but the benefits would be better, especially since I would get a pension after putting many years in. If I stay where I am now, I will learn a lot more and gain the skills needed to move up and get to the income level I want much quicker.

    Basically my question is this… is it better to make less over many years at a more “secure” job and collect a pension at the end, but your forced to stay at the same place for 20-30 years… or is it better to take a risk and work harder to learn more and make more $ in the private sector, but rely solely on your 401k (and other investments) for retirement? FYI – my wife and I have also thought about relocating, since the cost of living where we currently live is so high. Another reason I’m not sure it’s worth making the career move.

    Any input/advice is appreciated.

    1. Pensions are very rare these days. That alone would make the switch enticing.

      On the other hand, at 32 I was burnt out after just a few years of being a lawyer. But I pushed through it and made myself become completely dedicated to a high level of practice. The money has certainly followed (I’m nearing 47 now), and with it the financial ability to do things that keep the burnout at bay.

      It seems to me you could have the best of both worlds. Civil Service by day, with a steady income and great government benefits. IT side hustle by night. You may not want to give tons of your time to it (given you have children) but IT could still supplement your income nicely I’m sure.

      Good luck! I married late, so I have a young family and a stay at home wife myself. Whatever you do, make sure you take time for them. They are your real side hustle. You will turn around tomorrow and by 47 yourself, believe me.

  12. “For those making $50,000+ income, there should be no excuses for not maxing out your 401K. For 2016, the max limit is $18,000.”

    I agree with most of what you say but this seems a little off for the common man. Unless you live like a miser how would you be able to afford to live on 32k (before taxes)?

    However, I do agree that 100% with “…only petulant fools borrow from their 401ks. Have the discipline to want less, or buy a home only after you can comfortably come up with a 20% downpayment.” I see people every day taking money out from their TSPs for weddings, rings, cars, etc. It always leaves me shaking my head in disbelief knowing that people are, as I am wont to say, crapping on their future by living in the present.

  13. A lot of great stuff in this article, Sam, but I just don’t agree that anybody should be putting savings meant for a down payment into the stock market, especially if you’re looking to buy within 1-3 years. As we’ve seen these past 2 weeks, you have a not-insignificant chance of losing money over that brief timeframe. Personally, I’d much rather have that cash in a 5-year CD earning 1.6% with the comfort of knowing I won’t come out with less than I put in.

    If your home purchase time horizon is 5-10 years, though, that’s a different story…

    1. The farther away you are from purchasing your home, the stronger you should stick with the asset allocation framework. Once you are within one year of purchase, I would shift your downpayment money to a 50/50 equities/fixed income split AT MOST. The closer you get to actually buying a property, the more you should consider converting your downpayment money to 100% cash. Given you will continue to save and invest each month, you should theoretically be always boosting your savings.

      Deciding when to de-risk your downpayment investment money is an individual choice that depends on your risk tolerance, investing ability, and income stream. One good rule of thumb I use is the 10% RULE. If your annual after tax savings can easily make up for a 10% decline in your downpayment investment portfolio then you probably can afford to keep allocating based on your preferred asset allocation.

      Know that bond prices have done extremely well in this recent market downturn. Check out IEF and MUB for example. I’m not suggesting 100% in stocks by any means with a downpayment, although one could theoretically risk it if their cash flow is high enough.

      I’ll make this point clearer in my post with bold lettering. Is putting money in CDs for your downpayment what you did? If so, what duration CDs did you use and when did you buy your home?

      1. That is a good point about potential tax savings. Also, full disclosure, I haven’t bought my first house yet, but I’ve been aggressively saving for the down payment for the last 2-3 years (I’m just shy of 6 figures in that fund). I’ve recently started putting excess cash into Betterment, but that is a longer-term investment that I’m not planning to use for the down payment.

        One other potential risk I see is if the stock market tanks along with the real estate market. If your down payment portfolio falls along with real estate, you’re less able to take advantage of the low RE prices than if you had that money protected in a CD. I know bonds typically rise when stocks fall, but over the past few years stocks and bonds have been pretty correlated due to the Fed’s manipulation.

        Maybe I’m just trying to make myself feel better for not jumping into the RE market in 2012/2013 though :/ Hindsight is 20/20!

        1. To clarify, where are you keeping your house downpayment fund then as you mention Betterment?

          Check the performance of IEF, it’s been pretty rock steady for the past 5 years and has not been correlated due to the Fed’s manipulation.

          What were you doing with your money in 2012/2013 and before?

          I think you’ll enjoy my upcoming article on investing in risk-free assets like CDs.

          1. Thanks for the reply, Sam. Sorry if I was unclear above – I have just about $100K in CDs right now (cash meant for a down payment), and then I’ve started a small Betterment fund with an additional $6K while also maxing out my 401K contributions. Even with $100K, it’s a challenge to find someplace affordable in Washington, DC. Also, you’re right, IEF has been pretty solid these past few years. I guess I just keep buying into the rising interest rate fears even though inflation is basically nonexistent!

            I was much less educated about money matters in 2012/2013 (and earned a lower income than I do now), so I just stuck most of it in a savings account apart from some index funds. Good to look back and see how much I’ve learned and continue to learn since then!

            I’ll look forward to that post on risk-free assets – I suspect part of it will deal with the fact that they’re not always as “risk-free” as they appear (due to inflation, alternative investment growth, etc.)

  14. Hi, great post!
    I’m currently maxing out my 401k and me and my wife are planning to buy a house in about 5-7 years. We have about 60k sitting in a savings account and are planning to add to that as much as possible.
    Everything that I read says not to put the down payment money into the market because of the short time horizon. It looks like you disagree with that, so I’m curious about your recommendation of a good fund or funds to use for the down payment money. I’m not happy about a 1% return on a high yield savings account and a 5 year CD isn’t getting much better rates. I was considering maybe a total bond market fund or a state specific muni bond fund(for obvious tax purposes). Any suggestions?

    1. The farther away you are from purchasing your home, the stronger you should stick with the asset allocation framework. Once you are within one year of purchase, I would shift your downpayment money to a 50/50 equities/fixed income split AT MOST. The closer you get to actually buying a property, the more you should consider converting your downpayment money to 100% cash. Given you will continue to save and invest each month, you should theoretically be always boosting your savings.

      Deciding when to de-risk your downpayment investment money is an individual choice that depends on your risk tolerance, investing ability, and income stream. One good rule of thumb I use is the 10% RULE. If your annual after tax savings can easily make up for a 10% decline in your downpayment investment portfolio then you probably can afford to keep allocating based on your preferred asset allocation.

      Know that bond prices have done extremely well in this recent market downturn. Check out IEF and MUB for example. I’m not suggesting 100% in stocks by any means with a downpayment, although one could theoretically risk it if their cash flow is high enough.

  15. Christophhh

    So the last two years I maxed out my 401k, but a few months ago I decided to stop contributing any more than my company match, which is 5%. I know that the 401k is one of your favorite instruments to wealth, but I’ve just found too many negatives with it. I don’t like having my money tied up where I can’t get to it without paying the government a penalty tax, I don’t like the minimal investment choices I get to choose from which can hurt my ability to get a good ROI and I personally plan on my tax bracket being higher when I retire then it is right now because I plan to retire rich. And I really like the ability to invest in real estate or my own startup if the opportunity presents itself.

    I’m 25, made around $100,000 last year and save 60-70% after-tax. I like that the money is invested in the stock market, but I can easily use some of it to buy a home when I am ready. Instead of it being a one or the other type of a decision presented by this post. I’d appreciate your thoughts.

  16. Formative Fortunes

    Raised some very good points, i agree with the 1st point in the summary, jobs can definitely change in an instance therefore its better not to settle down into a house. I feel the safest way to save money for my downpayment would to just keep my assets liquid. I feel that the downside of throwing it into a 401k or bond is that, for bonds i have to wait till it matures to gain on my investment and by the time that hits the house with the best deal that i may want could be sold and thats the same for the 401k, if the market is down i may hesitate to liquify my assets if their value declines. I rather have my money ready to buy a house that I love then miss out on opportunities because my assets aren’t liquid.

  17. Great coverage of the key decision points in making the call between tax sheltered investments and long term financial goals / home ownership.

    I’m glad you gave some time to avoiding being house-poor. Living in Silicon Valley with its ridiculous home & rent prices, it’s easy to get sucked into over-buying a home. Our family of 4 lives in a 2 BR / 1.5 BA specifically so we can save money for what matters most to us – our children, our retirement, and general life quality. Not a micro house, but tighter than many of your readers are likely used to. When it comes down to it, like life, a home is a home, no matter where it is, as long as it has the right people in it.

    1. Tight, but not bad! Having a home in Silicon Valley has been good for one’s net worth over the past 10 years. You can always move and get so much more. It’s good to have that excess cash, cash flow, and liquidity. It feels awesome downsizing and living more within my means starting in 2014.

  18. Hi Sam,

    I’ve been checking out your site lately among other personal finance sights recommended including the Get Rich Slowly blog by JD Roth. I am 32 and recently married looking to potential buy a place in the Hoboken/Jersey City area in New Jersey. 2BR’s apartments in the area calling for roughly 500k on most places so ideally we would like to put 100k down (around July). We should be able to do this with wedding money and continuing to build cash savings but I’d like your advice on my current financial state. (implying we should – still a little short of that goal). Plan would to be to live here 5-8 years and either Sell pending market or keep as investment property long term and move into a house.

    Base Salary 115k (as of last May)

    401k Contribution 10% with 8% company match up to $10k
    Current balance 60k allocated among 7 funds with portfolio most resembling Aggressive Growth.

    Fidelity Roth IRA 20k – Maxed 2015 & 2016 (2016 unfortunately I allocated on Jan 4 to a few funds getting long domestic/international stocks – YIKES given the start of the year) Portfolio best resembling aggressive growth as well.

    Personal savings Discover account – 15k cash

    Hang up starts with student loans where I still owe 58k in private loans @ 3% adjustable and 11k Fed Fixed @ 3.25% (not worried about the Fed Fixed loans)

    Now that I’ve maxed out Roth IRA, my plan this year was to aggressively pay down private student loans with rates on the rise (slowly but surely) where my monthly min payment was $451 and pay an additional $500 a month to pay down principal more quickly that I would otherwise contribute to cash savings for the down payment.

    Does this make sense to you? Should I be looking at any piece differently? You seem adamant about maxing 401k which I agree with but I may need to save additional cash for the down payment and extra student loan payments.

    Any advice would be greatly appreciated.

    Thanks,
    Matt

    1. Howdy Matt – Even though you’ve provided a lot, I don’t know your net worth, your partner’s income, etc.

      I don’t think your student loan interest rate will go up much at all. 3-3.25% is cheap, and I wouldn’t be in a hurry to pay it down unless it truly annoys you.

      $115K is a high salary to be able to max out all tax-advantaged contributions while saving/investing for a DP.

      If you want to more specific advice, check out: https://www.financialsamurai.com/consulting

      Cheers

      1. Hi Sam,
        Net worth effectively flat to slightly negative for me right now. (not including shared cash account)
        I owe 70k to Navient total and 32k to a family member interest free.

        The student loans do annoy me but I would agree rates shouldn’t shoot up drastically in the near future. I think before having kids I would like to slash the debt amount in half within 3-4 years.

        My wife makes 70k – 45k in retirement accounts – 50k cash savings. We also have 50k cash in a shared account.

        We currently rent and can save combined around $1,500 – $1,800 per month. We are not 100% sure where we want to live and careers could continue to expand so I think at this point it may make more sense to rent and save cash 1 or 2 more years than putting a 100k down payment on an apartment now. I feel like we may getting in at the top of a market and apartments selling for 500k for a 2BR is scary to sign up for.

        From reading prior posts it seems like you like real estate holdings but any thoughts on renting to build cash savings as described above and holding off on buying an apartment? Thinking here would be to save for our forever house further from he city area for the same price as an apartment would be around here.

        Thanks,
        Matt

  19. MrFireStation

    I’m 49 and getting ready to early retire in about 10 weeks. Your advice on maxing out the 401k first is spot-on. I maxed out my 401k contribution % when I started working in 1989 and started hitting the annual max a few years later as my income grew. That has been the single best investment I’ve ever made. Even when we bought our house, we never decreased what we were putting in the 401k.

  20. The Alchemist

    Born and raised in the most expensive place to live on the planet (the San Francisco peninsula), my goal my entire working life has been to buy a home here. Not easy to do on a single income, unless you’re a financial whiz a la Sam, a genius IT guru, or a dazzling entrepreneur (I check “None of the Above”).

    While chugging away at that goal for decades, I’ve consistently maxed out my 403(b). While the goalpost of home ownership seems to shift eternally beyond reach with the insane market here, I’ve at least had the comfort of seeing that retirement pot grow. My down payment savings have continued to grow as well, but nowhere near as fast. Matching and tax-free growth are priceless!

    The good thing is that at a certain critical mass the retirement account will be able to chug along decently under its own steam. So if/when the day comes that I finally am able to buy a shack here, and am forced to severely cut back (or even cease) contributions to the 403(b) in order to feed the gaping mortgage maw, my retirement savings will remain somewhat self-sustaining. I’ve fed the retirement monster for years, so it can sit back and digest a bit while I begin stoking the mortgage monster.

    So I’m just saying that I agree with Sam. Is it possible I could have bought a house by now had I plowed more into my down payment fund rather than my 403(b) all these years? Hmmm…. debatable. But I would have lost out on a ton of matching and the benefits of tax-free growth. Now at least when I buy a house, I won’t have to compound mortgage worries with retirement savings worries. The retirement savings are nicely built up already, and can get along with minimal care and feeding if need be.

    Of course, all that being said, I don’t think I’ll be looking at my retirement account this week. Might not be good for my health….

    1. Look on the bright side. At least you weren’t born and raised in the truly most expensive place to live in America: MANHATTAN! Manhattan is 25%+ more expensive than the Bay Area, SF, PA, etc. So many people are drowning there who make $250K – $500K/year.

      It’s hard to appreciate what we have without comparison, but I do believe your retirement account must be a nice hefty chunky if you’ve been consistently contributing after all these years. There’s something very nice to be said about being liquid.

      And don’t worry, Bay Area real estate is coming down over the next several years. 2018-2020 could be the time to finally buy!

      1. Yes Manhattan is rough. No amount of money is enough here. Not only is it expensive, you just can’t get the quality of life that is abundant in places like CA for any amount of money. I have been here way too long and never felt the urge to settle down here, hence never bought a residence. Like you say Sam, I consider lifestyle first, and I am not thrilled with the lifestyle in Manhattan at any price point. I want to ‘retire’ to somewhere like San Diego or the Bay Area or even Central CA, but I am having trouble figuring out how much money I would need to save up before doing that such that I never have to work again. Being young-ish, almost 40 with 2 little children makes it a big question mark.

        1. But, I do think NYC is the greatest city in the world for 6 month a year! I love, love, love NYC! Just got to make $500,000+ a year to afford a decent 2/2, 1,200 sqft, $2M pad, and have money left over for food, clothing, shelter, tuition, etc!

          You will truly enjoy how much more your money goes if you ever move though. I would do so if you can find income even 70% of what you make now with two kids.

  21. I agree with your points of going for 401k savings first before saving for a house. It’s so true that one is likely to change jobs before having saved enough to purchase a property. Perhaps you’d still be in the same city, but you might have moved to a different neighborhood to be closer to a new office and hence your preferences in property locations would change, etc. Time offers such an advantage when it comes to investing and saving for retirement. Plus, putting one’s focus on retirement contributions first helps save on taxes each year, thereby helping one have money leftover to save for a downpayment.

  22. I enjoyed reading this article. I do have a question for you regarding maxing out a 401k. My wife and I combined make roughly 80-90k per year. My income is pretty volatile because I am in commission sales. We are both young, and both in school full time as well.

    My wife is currently contributing 10% to her 401k (Roth), and I am contributing just 3% into my Simple IRA (Pre-Tax). I am wondering if you would still recommend us to max out our contributions to these, or use different retirement vehicles? I am maxing out a separate Roth IRA, because I prefer this over a Pre-Tax IRA offered through my work (tax free growth, no fees, ability to invest in index ETFs, among other things). Currently 50% of our funds are in the market, be it the accounts listed above, or in separate brokerage accounts.

    My question; would you recommend my wife and I max our employee sponsored plans, or would you recommend that we continue to get the match, but focus on funding our Roth IRAs? I just prefer Roth vs. Pre Tax accounts.

    My thoughts may be jumbled, but I am hoping you can help out with that. Any thoughts would be appreciated. Thank you! :)

    1. Hi Kyle,

      The most interesting question I have is how are you guys making $80K-90K while still in school FULL TIME?! That is amazing! I made like $2,000 a year when I was in school, and was too busy studying and doing other stuff. How old are y’all? Could be a great post following my, Student Loans Are At Record Highs – What’s The Big Deal? post.

      If the amount you’re saving doesn’t hurt, I don’t think you’re saving enough. Test out a max for several months and see how you and your budget feels. With 80-90K in gross income, you guys should be able to max out your tax-advantaged accounts no problem and still save money in a liquid vehicle after.

      1. I’m 22, my wife is 23. I’ll take a look at your student loan post for sure! We actually haven’t needed to pull out any student loans, due to aggressive search for scholarships, grants, and any financial aid out there. I’m in my last quarter, and my wife has a few more years to go. But we definitely have it in our plan to have gotten our degrees without going into debt. The opportunity is out there, people just need to look and work hard enough on the scholarship opportunities.

        I’d love to get your thoughts on the savings. You’d recommend maxing out our 401ks? Is there a reason to do this instead of funding a Roth IRA? Or are you recommending we do BOTH? It’s a balance between putting these funds in accounts I cant touch for years vs. having these funds available for buying a house with a large down payment. That is the biggest reason I am not putting more of these funds into tax-advantageous accounts, I want them to be available for such a purchase.

  23. Charleston.C

    I’ve got a silly question for you, how would one go about maxing out the 401k contribution? Specifically what would happen if I over contribute? I understand that the limit is $18,000, but how would I go about reaching that limit without going over?

    If I base my contribution as a percentage of my paycheck, it will always be a moving target to hit $18,000 as my paycheck fluctuates due to overtime. I suppose I can base it on dollar amount per paycheck, so $346.15 a week to get to $18,000? or would I make whatever contribution and then elect to contribute an additional lump sum at the end of the year to bring me up to the $18,000?

    One way or another, after reading your posts for a couple of years, I’ve finally convinced myself it is borderline impossible to make up for the tax advantage year after year regardless of how I hard I try or how well I do to make my money grow.

    1. There are several ways to do it.

      1) Estimate your monthly paycheck and contribute a percentage equal to $18,000 for the year. $100,000 gross income. Input 18% per paycheck in your 401K contribution plan for automatic withdrawal and you are there.

      2) Estimate your monthly paycheck and contribute a GREATER percentage equal to $18,00 for the year. $100,000 gross income. Input 30% per paycheck, and when you hit $18,000 your 401k provider will automatically stop up to $18,000. Or, it will ask you whether to automatically stop and contribute after tax contributions after $18,000.

      3) Contribute a certain percentage of your gross income each month and in November, calculate how much you have contributed, and top of the remaining balance. Contribution changes to 401k take time to change, often 2 pay cycles so that’s why I say November.

      4) Contribute a certain percentage each month and then contribute a percentage equal to or greater than with automatic top at $18,000 from your bonus.

      Have a conversation with your HR provider (like Fidelity) and go through your options. Ask HR about your company match and profit sharing as well. Let me know what you hear.

      S

      1. Just a friendly reminder that if your plan plan has a match, do your homework before using option #2 above, which involves front loading your account to max out earlier in the year. What you’ll want to research is whether or not your company plan allows for “true ups”.

        For example, let’s say your company matches 100% on the first 3% of your contributions. You make $100,000 year. Halfway through the year, you max out your 401(k), but you’ve only received the match on half your salary ($50,000), because your match is applied each paycheck.

        If your company does not “true up” (many don’t), in this example you will have received only $1,500 in match money (3% of $50k).

        If your company does “true up”, they will make you whole for the missed months of match, and you will receive an additional $1,500 at the end of the year to reflect the “missed match”, for a total of $3,000 match dollars.

        Alternatively, if you spread out your contributions over every pay cycle, then you don’t have to worry about this. This special situation only applies to matching contributions made on a per payroll basis, and is a non-issue for any other employer contribution.

        I work in the industry and have seen people get burned with this so just wanted to pass along a little nugget of wisdom from experience. =)

    2. You just approximate the % you need per paycheck (include bonuses too if the company will give you some match) to hit $18,000. If you end up working more overtime then expected, or get a raise or unexpected bonus midyear, you can reduce the contribution % a bit to balance it out. Your employer should automatically stop the contributions once you hit the max. I think i slightly over-contributed such that I hit my max in late November. My employer didn’t make any contributions in December even though I had a 5% allocation set up.

    3. I think asking HR is key.

      Most companies want you to invest as much as possible into your 401k and my experience is that they are more than willing to help with specific suggestions on how much to save.

      They are much less likely to offer investment advice (in fact, I’m not sure any do that), but generally quite helpful on how much to sock away.

  24. Sam ~

    another item to consider if planning for early retirement (pre 59 1/2) for penalty free withdraws.

    Series of Substantially Equal Periodic Payments (SOSEPP), provided for under §72(t)(2)(A)(iv) of the Internal Revenue Code.

    It allows access to a percentage of your 401k/IRA based on life expectancy and a minimum of 5 years of that same withdraw rate without penalty.

    It takes planning and some calculations to do to determine amounts, and it isn’t revocable after starting without penalty, but with planning it can be done. (IRS link below for details)

    https://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-Substantially-Equal-Periodic-Payments

    I am not an expert, but based on research for my own situation if I wanted to start drawing at age 45 against a $1,000,000 Account (round numbers used for easy math). I would start drawing $25,773.20 a year for a minimum of 5 years (based on the single life expectancy table for a 45 year old being 38.8 years, there is an additional adjustment based on which of the 3 methods of calculation used for interest on the account etc.) After the 5 years it can be adjusted based on the new tables applicable for 50 years old, or based on the new value of the account at that point in time. I’d suggest talking with a good accountant, before starting anything like this, and personal situation etc., but options are always good to have.

    After doing a lot of research (and discussions with my Adviser) I personally decided to not utilize this method as part of my desired retirement plan, and build up a more accessible taxable account to fund the early portions of my retirement. SOSEPP is a fall back plan though if for some reason the other easier (and penalty free) options fail to meet expectations.

    ~T~

      1. It would be interesting to see a post on what to do if you have a large amount tied up in a 401k, want to retire early (before 59 1/2) and yet don’t want to use Rule 72.

        My situation is roughly:

        1. I’ll have enough to retire at age 55 or so.
        2. However, the majority of that is in a 401k/IRAs that I can’t access until 59 1/2
        3. I don’t want to use Rule 72
        4. What are my options for spanning the gap?

        I have ideas and a plan, but it would be interesting to hear yours as well.

        1. How about your after-tax investments to last for 4 1/2 years until you can withdraw from your 401(k)? I thought you had a lot of cash flow from your 14 properties as well? Sorry I am assuming too much. It sounds like you’re in great shape to last through the Gap.

          1. You are right…for me.

            But what about someone that has $2 million in index funds and $1.5 million of that is in 401ks/IRAs?

            Should they:

            1. Work longer?
            2. Live off the $500k they have in taxable funds with a downsized side job/business?
            3. Adjust expenses and live well below their means until the $1.5 million is accessible?

            Lots of possibilities.

            I guess the real answer is to understand that this could be an issue well in advance (like 20-30 years in advance) and plan according with real estate investments, creating a side business (like a website), and so forth. You know a few things about those, right? ;)

            1. Not sure how someone will be able to survive off only $500,000 for five years with $1.5 million left over and Social Security several years later. Might have to look into government assistance programs.

              I’m sure they will find a way!

            2. This is my question to both of you. As a young person leaving my job with a sizeable 401(k) and wanting to retire at least 10 years before 59.5 (now 30 years out)…what should I do? Roll it over to IRA? Keep it there? I really want to buy some equities in a taxable account and just take the initial income tax hit and 10% penalty as stupid as that sounds. That way I know where my cash flow is and will be and can factor in additional earning and taxes moving forward. What would you guys suggest???

              I am moving due to wife’s job so gotta find one from my own.

  25. SavvyFinancialLatina

    I agree with you Sam. Max out your 401K and use the leftover cash to save for a down payment. I didn’t do this, and I regret it because you can never get back those contributions you missed. Good thing I realized it quickly and started maxing out my 401K.

    1. I did this because I had no interest in buying a house at first. I’m so glad I did – my 401(k) is a really healthy $100k or so six years in despite not much help from the stock market.

      1. SavvyFinancialLatina

        Honestly, my take home paycheck didn’t change by much. I had no idea how much I would save in taxes by maxing out my 401K.

        1. Exactly – esp if you make a decently high income in NYC or California you’ll see a huge tax benefit. Effectively the govt is supercharging your ability to save more now.

  26. Brian Robben

    What do you think of James Altucher’s opinion that he’s never going to own a home and home ownership is a scam? Altucher says, “Housing returned 0.4% per year from from 1890 to 2004,” among other arguments against owning a home like it not being liquid, high leverage, and no diversification. Obviously there are many benefits to buying a house, but it’s an interesting debate.

    1. Hi Brian,

      James also says nobody should invest in a 401k and the stock market is a scam. He has built his audience around a great strategy of self-loathing and getting rich and back to self-loathing. It is a GREAT strategy for those who want to start their own website and market themselves for attention and more profits. He uses very extreme headlines to get people to read his work – again, a very smart strategy. The goal is to be very controversial. You can make an argument by cherry picking data.

      My goal is to address a serious question in this post I know plenty of people have been struggling with for years. For homeownership, it’s obvious there are stronger markets than others.

      Feel free to share your thoughts on the subject.

      1. Brian Robben

        He accomplishes his goal of being controversial and driving traffic because of it, that’s for sure. But, I’m personally not a fan of the self-loathing work.

        Anyway, back to your post, I agree what you addressed is a common question and your insight is helpful like always (there’s a reason I keep coming back to this site). I prefer to own a liquid portfolio of stocks as a young adult because I have decades ahead of me before I’ll need the money. So I can weather the bearish markets, like now, and get more volatile low-cost index funds and individual stocks to hope for higher returns. And I don’t believe real estate has the same upside to 10x, 25x, or 50x like some individual stocks.

      2. I’m not sure anybody believes those five points nor am I aware of pushing those five points except for perhaps a realtor who really wants to sell or buy someone a home?

        As I’ve written so many times, but property for quality of life first, and then of there’s price appreciation and rental income opportunity then great. Enjoy LIFE! We spend 12 hours a day in our homes on average. If we are going to spend money, why not spent money on things we use the most?

        Always answer the WHY we save and invest our money. I like buying things that provide utility.

        https://www.financialsamurai.com/invest-in-real-estate-for-capital-appreciation-rental-income-or-lifestyle/

        1. No one consciously pushes these points, they’re more like strong invisible societal scripts that a lot of people have internalized.

          3/5 are pretty apparent from looking at debt numbers and job satisfaction surveys imho.

          Maybe 1 isn’t as big an issue in the US where the financial crisis is still fresh in everyone’s mind, but at least around here, this story seems pretty common:
          https://www.cbc.ca/news/business/real-estate-woes-the-secret-lives-of-house-poor-canadians-1.3086793

          #2 is a script you probably only encounter if you live a more nomadic lifestyle. I know a lot of location independent entrepreneurs get asked when they’re going to “settle down” (code for buy a house + start a family).

          #4 might only happen in certain markets, but its a pretty common here.
          https://www.thestar.com/life/homes/2015/10/30/why-millennials-are-ditching-city-life-and-braving-the-commute.html
          I guess if you assume everyone *needs* a house with 4 bedrooms and a backyard, then a 4 hour commute for the next few decades could start to make sense.

          Anyways, sorry for derailing from the original topic! I agree 100% with your philosophy of working hard, making sensible investments, and enjoying the fruits of that labor which can include owning a nice house (or a few).

          But while calling homeownership a “scam” like Altucher does might be for clickbait purposes only, I do think its certainly worth questioning whether owning a house is actually going to make your life better, and I don’t think that gets questioned often enough.

        2. No one consciously pushes these points, they’re more like strong invisible societal scripts that a lot of people have internalized.

          3/5 are pretty apparent from looking at debt numbers and job satisfaction surveys imho.

          Maybe 1 isn’t as big an issue in the US where the financial crisis is still fresh in everyone’s mind, but at least around here, this story seems pretty common:
          https://www.cbc.ca/news/business/real-estate-woes-the-secret-lives-of-house-poor-canadians-1.3086793

          #2 is a script you probably only encounter if you live a more nomadic lifestyle. I know a lot of location independent entrepreneurs get asked when they’re going to “settle down” (code for buy a house + start a family).

          #4 might only happen in certain markets, but its a pretty common here.
          https://www.thestar.com/life/homes/2015/10/30/why-millennials-are-ditching-city-life-and-braving-the-commute.html
          I guess if you assume everyone *needs* a house with 4 bedrooms and a backyard, then a 4 hour commute for the next few decades could start to make sense.

          Anyways, sorry for derailing from the original topic! I agree 100% with your philosophy of working hard, making sensible investments, and enjoying the fruits of that labor which can include owning a nice house (or a few).

          But while calling homeownership a “scam” like Altucher does might be for clickbait purposes only, I do think its certainly worth questioning whether owning a house is actually going to make your life better, and I don’t think that gets questioned often enough.

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