Nearly one in ten tap into retirement plans to buy a home

Joseph Lee, CFP®
Lee Financial Planning
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Lee Financial Planning provides highly personalized guidance to help clients navigate life's challenges. We specialize in helping prepare for life's unexpected events and setting a course toward fulfilling and secure retirements.

For many, owning a home is one of their most important - and financially challenging - life goals. Some are resorting to creative and sometimes riskier financial strategies to make their first home purchase. Just under 10% of homeowners say they took out money from their retirement savings to help cover the down payment and closing costs on their first dwelling, according to a new study. Others paid for their down payment with a gift from family or friends (21%), a family loan (6%), or even moving in with family or friends to be able to save enough (6%).1

Millennials in particular are struggling to afford their first home, though homeownership remains an aspiration for a vast majority of Millennials. According to a recent survey, a majority of Millennials prioritize homeownership over other major life events and goals, such as getting married and having children. Seven in ten are actively cutting back on lifestyle expenses in order to save enough for their first home.2

 

But many Millennials lag behind other generations in buying their first home, due to rising housing costs and the burdens of student loans, according to recent studies. Moreover, they are facing increasing challenges in today’s real estate market. According to analyses by Zillow, starter home prices have increased by 57% over the last five years, while inventory has dropped by 23%. Nearly three-quarters of Millennials now say that saving for a down payment on a home represents the greatest hurdle toward achieving the American dream.3

Using retirement account savings for purchasing a home or other needs can, however, be a risky choice that might jeopardize long-term financial security. Withdrawing from a 401(k) to pay the down payment for a home can not only undermine retirement preparation, but is subject to tax withholding and a potential penalty tax.

About half (52%) of Americans say they have tapped into their retirement plan, most commonly to pay off debt (23%), for a down payment on a home (17%), to pay education expenses (11%), or to pay medical expenses (9%). Millennials are much more likely than older generations to say they have withdrawn from their retirement savings account early.  54% of millennial savers say they’ve taken an early withdrawal from a retirement savings account, compared with 43% of baby boomers.4

It is often a challenge to balance short-term financial needs with retirement preparation - particularly for younger generations who may not yet realize the significant benefits of starting retirement preparation early. Having a comprehensive financial plan can help prioritize needs while staying the course for long-term financial security.

 

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Purchasing a home

Strategies to optimize retirement savings

Balancing short-term needs with long-term financial preparation

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1.  CNBC, Here’s how many people tapped a retirement plan to buy their house, September 2019

2. 2018 Fall Homebuyer Insights Report, Bank of America

3. TD Bank's second annual First-Time Home Buyer Pulse

4. Lendingtree, August 2019

This publication is designed to provide general information and is for discussion purposes only. The effectiveness of any strategy is dependent upon each individual’s facts and circumstances. This article does not provide legal, tax or account advice. Because of the possibility of human or mechanical error, the accuracy, adequacy, completeness or availability of any information is not guaranteed.