Mar 24, 2025
As home prices climb, it’s become increasingly difficult for many first-time homebuyers to save for a down payment. And some may be wondering if they should cut back on their retirement savings so they can afford to buy a house.
For example, Seattle newlyweds Cindy and Jack are struggling to save money for a down payment on a home while also saving for retirement. So, they’re wondering if they should cut back on their 401(k) contributions, at least for a while, to build up their house fund.
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The couple, both aged 29, are off to a good financial start. While they’re struggling to save, they have no credit card debt, they’ve built up a six-month emergency fund and their combined 401(k) balances total about $100,000. They’re currently contributing about 25% of their income to their respective 401(k) plans and putting away whatever’s left at the end of the month toward a down payment.
But their house fund is a long way from what they think they’ll need for a down payment — pushing their dreams of homeownership much further into the future.
Housing affordability crisis
It’s increasingly difficult for first-time homebuyers in America to save for a down payment. Prices have increased more than 50% over the past five years, as measured by the S&P CoreLogic Case-Shiller U.S. National Home Price Index. At the same time, real median U.S. household income remained relatively stagnant from 2019 to 2023, according to government data.
A commonly cited benchmark for housing to be affordable is that no more than 30% of your household income should go toward housing costs. Once you’re spending more than that, you may be deemed cost-burdened. In 2023, 27.1% of U.S. households with a mortgage were considered cost-burdened, according to Pew Research Center.
One way to avoid this is to make as large of a down payment as possible on a home, which helps to reduce the size of ongoing housing costs. But this is easier said than done. A median income household would typically need a down payment of $127,750, or 35.4%, to not be cost-burdened by their home, according to an analysis of major U.S. housing markets published June 2024 by Zillow.
Of course, these figures vary by location. The analysis shows 10 of the 50 biggest metro markets are still affordable for those with a median household income for the area and a 20% down payment. But other markets are almost out of reach.
In Seattle, where Cindy and Jack live, earning the median $116,000, would require a down payment of $462,000 to comfortably afford a typical home worth around $753,500, according to the analysis. Against this background, it’s extraordinarily difficult to save for a home and plan to not be cost-burdened.
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Weighing the 401(k) or down payment choice
What if working toward saving for both retirement and homeownership simultaneously is simply not achievable in the short term for some Americans?
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Some experts, such as personal finance personality Dave Ramsey, suggest that “if you’re planning to buy a house in the near future, it’s okay to hold off on your retirement savings and put that money toward your down payment.” But, he also argues that it’s only okay to do so for a year or two.
Like many experts, though, he recommends not cashing out or borrowing from your 401(k) because it could incur taxes and hurt the compounding growth of your assets, which could cost you a lot in retirement.
Buying a home and saving for retirement are not incompatible goals. If your home is paid off, this will likely lead to much lower housing costs in retirement and allow you to stretch your retirement income further. Plus, with home prices appreciating as they have in recent years, homeowners’ equity has been rising as well.
In retirement, you may be able to take advantage of your home equity by downsizing, selling and moving to a more affordable market, taking a home equity loan or entering a home equity agreement, where you receive a lump-sum payment from an investor in exchange for a share in your home’s future value.
Ideally, you’ll be able to save for a down payment and keep your 401(k) contributions at a level that maximizes the matching by your employer so you can grow your nest egg at an optimal rate.
To do this, Cindy and Jack may want to consider measures like buying a house in a less expensive market, taking on a side hustle to bring in some extra money and perhaps cutting back on discretionary expenses such as entertainment or vacations.
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Vawn Himmelsbach is a veteran journalist who has been covering tech, business, finance and travel for the past three decades. Her work has been featured in publications such as The Globe and Mail, Toronto Star, National Post, Metro News, Canadian Geographic, Zoomer, CAA Magazine, Travelweek, Explore Magazine, Flare and Consumer Reports, to name a few.
