Should you save for retirement or a home down payment? And what about when a 401K match is involved?
20SF reader, Steph, writes in:
“I’m 26 and up until now have saved about 6% of my income to my 401k. I recently started a new job and was offered a free financial consultation at work. I told the adviser that I wanted to buy a house by the time I’m 30 and asked about how to save. She said that since I have such a tangible short-term goal that I should think about saving the money I would have otherwise put into my 401k. For the past few months I’ve been saving around $500 a month to put towards a house. Is this a smart thing to do? I am missing out on company contribution matching to my 401k but it isn’t much since I’m not vested etc. Do you have any advice? “
A little more context was needed, so I dug a little deeper on the match and vesting period, to which Stephanie responded:
“The company match between 0-5 years is $.50 for each dollar contributed up to 5% of compensation (5-10 years is $.75, 10 or more is $1.00). The vesting schedule is:
less than 2 years = 0%
after 2 years but less than 3 = 20%
after 3 but less than 4 = 40%
after 4 but less than 5 = 60%
after 5 but less than 6 = 80%
after 6 or more years = 100%”
Ahh… there’s the twist.
First – shame on your company for attempting to induce employee loyalty by giving out a shitty 401K match and then making you stay 6 FULL YEARS to get all of it (actually 10 years to get a dollar-for-dollar match). Companies should be confident enough in how they treat their employees that their 401K program vests immediately. The fact that they match so little and have a difficult vesting schedule is a big red flag, in my opinion. Pensions are a different story, but pensions are dead, so there’s no need to worry about that for most people. The only thing worse than vesting schedules like this are no match at all or a cliff vesting schedule (stay a minimum # of years, or you don’t get any 401K matching), so I guess that’s the silver lining. Got sidetracked there…
The vesting schedule definitely plays in to the answer here. But perhaps the most important variable here is a human element: how much do you actually like your new employer? And not how much you like them within the 3-6 month honeymoon phase, but how much you like them a year from now. If you see yourself with this employer for 5 years or more, I think it’s foolish to turn down the free 401K match. Here’s why…
1. You can always save for a house at a later time
But you can’t go back in time and get free money for your retirement. As time goes by, not contributing to your 401K and getting a free match cannot be undone. To divert funds away from your future self to acquire a material possession (albeit an important one) is something that your future self might be kicking your present self for doing.
2. If you can’t put aside 5%, maybe you shouldn’t be buying a house
Part of me thinks that if your cash flow is so tight that putting aside 5% to get the match vs. putting it towards home savings is an either/or proposition, then you’re definitely not at good enough financial standing to be thinking of buying a home. If you were in good standing, getting the match would be a no-brainer. What would happen if you bought the home, with zero margin for error, and then you lost your job or had a financial emergency? If there is enough cash flow to get the match – then there’s no reason not to.
On the other hand…
If you don’t plan on being with this employer very long or decide that much after the honeymoon phase wears off, then diverting those funds towards home savings might be the better route. Loyalty in the workplace is gone, and most people don’t even make it past 5 years in a job. But there are a lot of other variables at play (your monthly cash flow, how much you’ve saved already vs. how much a home in your geo costs, how much retirement savings do you already have, what is the price-rent ratio in your area, etc.).
Those are my thoughts.
Readers – what’s your take?