Should I reduce my 401(k) contributions to save money for a down payment?
I'm a 25-year-old engineer working on being prepared for retirement in 30 years. I currently have $100,000 put away between my employer-sponsored 401(k) and a Roth IRA and some mutual funds. I'm currently putting 26 percent of my salary (20 percent of my own and my employer's 6 percent match) into a 401(k) each month, and putting an additional $500 into a savings account as my emergency fund, and everything else budgeted accordingly. I've cut down as much frivolous spending as possible, but there just isn't enough left over to save more.
I know I have a long time to retirement, but I also know contributing a lot while I'm younger allows more time for me to make use of compounding effectively. Is it worth it to drop my 401(k) down to the 6 percent so I get the match, and put the rest in a savings account with the purpose of using it for a down payment only, or should I split the difference and go from 26 percent to 16 percent?
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I think either of the two options would work well, since you would still be contributing at least 10% to your retirement account (you can count your contribution and your employer's contribution for this benchmark). At your age, 12% is a healthy retirement contribution, especially if you are saving for a down payment on a home at the same time.
The real question is when you want to buy the home and how long would it take you to save for the down payment if you were saving 6% vs. 10% of your income toward the home. My recommendation is to run the numbers both ways and see how long it would take you to save up the down payment. Then see how you feel about each of those waiting periods.
If you are fine with the longer waiting period, then keep your retirement contributions at the higher level and just wait a little longer to purchase the home. If you'd rather buy the home sooner, or are worried about price or interest rate increases, then your strategy to get the full employer match and commit everything else to your home purchase would be wise.
The good news is you are not choosing between a good decision and a bad decision. You are choosing between two very good and responsible decisions. So, it is completely safe to go with your emotional desire in making this choice.