Should I Pause My 401K Contributions to Reach My Home Down Payment Faster at 26?

Many people dream of owning a home. But because so many Americans struggle to save money, you may find it tricky to get into a home, especially at a young age.

This Reddit poster is in a different boat, though. They’re 26 and have been funding their 401(k). But now, they want to know if they should pause their retirement plan contributions in order to save up a home down payment faster.

It’s an important question to be contemplating. But the poster needs to understand the pros and cons of each decision.

The upside of getting into a home sooner

The sooner you buy a home, the sooner you can start building equity in it. Plus, homes have a tendency to gain value over time. So if you buy one now and stay put for many years, you might end up being able to make a nice profit when you sell.

If you wait to buy a home, you risk having prices rise. If you can generally afford a place of your own now but your down payment needs a boost, it can be tempting to stop funding your 401(k) for a bit of time to make that happen.

The upside of prioritizing your 401(k)

As nice as it may be to get into a home sooner, you’re going to need money to cover your expenses in retirement. There’s no getting around that. And the sooner you manage to get money into your 401(k), the more it might grow.

Let’s say you’re 26 and you normally contribute $10,000 to your 401(k) each year. If you don’t put in $10,000 this year because you’re using that money for a home down payment, you won’t just be shy $10,000 in savings come retirement. You’ll be short $10,000 plus growth on that money.

In fact, say you’re able to invest that $10,000 at an annual 8% return, which is a bit below the stock market’s average, for the next 40 years. That turns $10,000 into about $217,000. And that’s a lot of retirement savings to give up.

Also, if your 401(k) plan offers a match, not contributing means giving up free money. That’s not something you should ever want to do if you can help it.

Weighing your options

The poster here has a real dilemma on their hands. They’re not suggesting raiding their 401(k) to buy a home. Rather, they’re simply wondering if they can stop funding it for a bit. Given their age, they should have plenty of time to make up for a limited period without contributions.

But again, it’s hard to overlook lost gains, which the example above illustrates. So what the poster, or anyone else with a similar conundrum, should do is talk to a financial advisor.

A financial advisor can help you balance your financial priorities and help you find ways to meet your various goals — even if they seem at odds with each other at times. Plus, a financial advisor may be able to help you find a way to get into a home without having to pause your 401(k) contributions.

Some loan programs, for example, let you put a small amount of money down at closing. A financial advisor can review these options with you and help you decide if they make sense. They can also help you calculate how much house you can afford to ensure that you don’t get in over your head if you do decide to focus on boosting your down payment in the near term.

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