Dear MarketWatch, My wife and I have been renting for many years, and we think it’s time to buy our first house. We live in Westchester County, N.Y., and we are looking for a home in the $450,000 to $475,000 price range.Would clearing out my 401, which is the smaller one, to put a down payment on the house be a bad idea? I know I would be taxed on it, but hopefully I can cover that. I am over 59 years of age, and I am hoping to retire in six years. My wife may retire a little before that.
I presented this hypothetical scenario to financial planners. Across the board, virtually all of them cautioned against this. Some were more blunt than others. “While rates and growth are not guaranteed, financial-planning models would show that using one-third of your retirement savings to buy a new home in the beginning of retirement would produce less disposable income in retirement, net of mortgage payments,” said Sean Pearson, a financial planner with Ameriprise Financial Services in Pennsylvania.
— Sean Pearson, a financial planner with Ameriprise Financial Services This is also true of owning the home. Sure, the down payment is the first hurdle, but down the road you’ll need to keep paying taxes and maintenance, even after the mortgage is paid off. So what would happen if you don’t have the funds to cover that well past your retirement? I doubt you or your wife would want to risk foreclosure or living in squalor down the road.
Again, though, taking money out of your retirement accounts to put toward a down payment has a big opportunity cost — it likely won’t earn as large a return by being invested in a home as it would being invested into the market.