Thanks, yes, I knew all of the above, and have converted some of my IRA to Roth in low tax years. Actually, I didn’t realize that average 401K balances were so low.
I wasn’t wondering about the average worker, but about my son and his current earnings/tax bracket situation, and trying to figure out if I am steering him wrong by suggesting he contribute $22K to Roth 401K and then $6500 to a non-deductible IRA that he will then convert to Roth. I assume he will shift to 401K once he triggers the 32% bracket, but I am uncertain in the 24%.
The one “flaw” in that whole argument is this…people don’t buy houses for financial reasons. They buy houses to accommodate a family. For me, it seems a little backwards to focus so much on retirement at 22. Save up for a house. Have kids. Buy a lawnmower and a 65 inch TV. Live a little. Smile and wave at your paranoid neighbor who’s staring at you from behind their curtains!
Homes are often the largest financial purchase of a person/family’s life. As such, home purchases can have dramatic impact on finances, including changing a lifetime financial trajectory. One should not ignore the financial aspects of a home purchase, but one should also consider the non-financial quality of life benefits when deciding whether/when to purchase a home. The original post summarized this by stating:
“My opinion is that 401k investment is generally financially advantageous to purchasing a home. There are also less direct financial advantages, such as being more open to opportunities for taking a high paying job out of area or working fully from home in lower cost of living area. Instead the primary benefits to buying a home are often not financial, improved quality of life benefits.”
One reason some people buy houses is to get into really good school districts. And while there may be rentals in any given area, they may not accomodate a family’s needs.
Some people may view this as an alternative/compromise to paying for private school.
I would have SO much more money today if I had invested in the S&P instead of buying a house. I would need to consider the costs of renting vs. home ownership in the calculation, but quick & dirty, I know that I did not make money owning my house.
For some, paying for college has outstripped the original home purchase, a sobering thought.
Some people don’t want to own a home (maintenance, spending free time mowing the lawn and unclogging gutters) but feel like “only a dope pays rent”. I think helping those folks realize that owning is not automatically the best financial decision is helpful.
Many people come to this conclusion after owning a house. After buying a house with a pool, I will never again buy another house with a pool. At the time, it sounded like a good idea.
On the plus side, I now know why not to add cyanuric acid unless you absolutely have to.
This is HUGE. My kids went to great public K-12 school for basically free. There are very few rentals in our area and accommodating a family of 4 would have been difficult and expensive.
Agree! Excellent public school education all the way, and like your area, no long term house rentals.
I have never regretted buying the house for the stability it provided, and I have continued to live in the same house even though my children have graduated from college and moved to their respective cities. The property taxes I have paid since moving here do not cover the cost of 26 years of K-12 schooling, let alone what a private school would have cost.
My bias is against home ownership in the early post-grad years, but that is because I lived in cities where I knew I would not remain long term, and prices were prohibitive. Also, rent stabilization in NYC (back in the day) made ownership even less attractive.
Renting might be better financially in the long term, but dealing with and/or being reliant on a landlord for housing my family was never a palatable option for me. Landlords can sell the property, charge exorbitant rent, be difficult to deal with or unresponsive. You can’t make any changes to the property since you don’t own it. No equity is built, no sharing in the upside. Why would I pay rent (which would be thousands more a year than I pay for my mortgage for the type of home I have if I could even find one in our area) and help my landlord build equity and make a profit as well? My H and I bought a house as soon as we could financially manage it. I would never willingly rent at this point in my life.
It is not just schools but the community that you raise your kids in that make home ownership so important to people. Our town had good schools, but also a great library, scouts programs, churches, community lake, recreation programs, etc. These were all important to me when choosing to own a home to raise my family.
However, once the kids are grown, or before you are married and considering having a family, renting my make more sense to people. Those are times when you are also more likely to want to move around (relocating for jobs etc.) and having a home may make that more expensive (costs of selling and buying a home).
Not every decision is made on money alone. Sure, an old used car (or no car at all) is cheaper than a new car. Still many of us have opted to purchase new cars. (In our case we keep them a decade or more, but still tis a splurge… .which we have justified.)
But sometimes…it is. Our kid’s rent more than doubled during COVID. That’s when he started to look. He wanted to somewhat stabilize his housing costs, even knowing that he would have some other expenses as an owner. He found a great townhouse just before the interest rates went way up…and the costs as well. IOW, he found the sweet spot. His total costs, including HOA fees are actually less than what he was paying to rent before the rent increase.
So for some…it’s about stabilizing the housing costs. And that’s OK too.
I don’t think there is any hard and fast rule that applies to every one and in every location. For years we lived in an area where the housing prices were so low that it was cheaper to own than rent. Not only did we build equity but we got the tax write off too.
That all said, we’re advising D to rent and not buy until she’s well established in her career. She’s in a rotational program now and will be moving every year for the next few years, and then will probably need to stay flexibility with mobility for at least the next decade. She has mentors who rushed to buy a house and now have passed up promotions and opportunities because they didn’t want to move. It’s much easier to leave a rental than deal with selling a house.
As such, she’ll be maxing out her all her saving and investing vehicles.
And one of mine lost money when a job transfer during covid meant “take the first offer and don’t look back”. Kid did not look back- was the right career move, but you don’t always get to control when the perfect professional opportunity shows up/when the housing market in your area has increased/when interest rates are working in your favor. So many variables!
But it seems like the loss was an absorbable one, as opposed to being leveraged into a deep negative equity situation that would have made getting out of the house much more difficult.
H and I are living in the 5th home we have purchased.
House #1 - bought when we were very young and had no downpayment (VA Loan), even then interest rate was over 13%. We both worked and no kids yet, but every spare penny seemed to go into the house. Sold it 3 years later when H was reassigned and lost money. If I could have a do over I would not have agreed to be homeowners so young as we missed out on a lot of other things being so “house poor” and it was a bad investment.
House #2 - we only owned for a little over a year (we had hoped to leave the area but it didn’t happen). We broke even after the selling costs.
House #3 - Lived in 11 years. We made a small amount of money when we sold, but when taking into account the capital improvements we made (H terraced the yard to make it usable, built a patio, finished a family room/playroom, full bath and bedroom in the basement) it was mostly break even.
House #4 - Bought 1998, sold 2022. Made a lot of money (sold 3X what we paid). Even given the improvements we made (H built a deck, finished the basement adding another family room, bedroom and full bath) and making updates along the way we still did really well. We got lucky and timed it just right.
House # 5 - living in it now.
My view is that a house CAN be a good financial investment, but not always. That’s what our experience is. But I never really looked at any of my houses that way. To me it is somewhere to live, as is renting. And I don’t think that buying a house is for everyone. Renting is not “throwing money away” as you are getting something for your money. Many people don’t want to bother with the upkeep of owning and I totally get that (and not everyone is as handy as my H).
OTOH - I believe in saving for retirement from the get go.
Not quite. HOA fees only cover routine maintenance. Large expenses like HVAC replacement (individual units), share for roof and pool repairs are still distributed to individual owners. And it can easily run to up to 20k assessment per unit. Our DD in HCOL area can afford to buy condo now but we advised her against it and to wait until she can afford to buy a house.