Do you have no other retirement savings besides the deferred comp and pension (no ss (asking because I’m a government worker who doesn’t contribute to ss), 401k or similar, IRA)?
>Is it ok to save less for retirement because I’ll be building equity in a house instead of renting?
Uhhhh, not to me it isn't.
You're building equity sure, but houses come with other expenses (and pricy ones at that) which don't typically come with renting, and accessing your equity requires more debt unless you sell outright.
You have to be able to do both things: rent AND save for retirement, or buy AND save for retirement. Saving for retirement isn't really the optional thing that gets sacrificed so you can do other things. You would typically want to find the money for your down payment by reducing your other expenses.
I don't know how old you are, but time in the market is the most important advantage you have right now.
Another thing you can do is a trial budget; figure out what the mortgage, insurance, taxes, utilities, repairs (typically 1-2% of the home's value annually), etc. would be on the home you want. The difference between that and your current rent/utilities is what you have to set aside each month and not spend. Run that experiment for 6-12 months and see how comfortable (or not) that is. I will give you an idea of what living with a home purchase will do to your lifestyle without locking you into a 30 year mortgage.
Maybe if you post your income, expenses, current contributions to retirement, what you currently have saved and what vehicle (401k, HYSA, etc.), age, it might be easier to give more solid advice.
A rule of thumb is that your monthly housing payments should be no more than 28% of your monthly gross. Your retirement savings should be about 15%.
Don’t count home equity as part of your retirement savings.
It’s OK to save less for retirement because you’ll be building equity in a house if you plan to sell your house later on to fund your retirement. Because otherwise, why does house equity matter in terms of your retirement?
Personally, I think you should still be able to save 15% of your income towards retirement after all other expenses. If you can’t, then you probably over stretched somewhere.
I dont really understand this take. Generally, you need a place to live and historically places to live get more expensive with time, not less. Even downgrading later typically doesnt result in mich of a reduction. I never factor house equity in retirement savings
He was asking if it made sense to build equity in a house he owned in lieu of saving for retirement. It doesn’t; one should be doing both and especially not sacrifice the latter for the former. I understand that if he buys a house, at some point he will no longer have to pay for a mortgage or rent, which is a large (most times the largest) expense one has. But the OP wasn’t asking about that; he wanted to know how to balance home ownership and retirement savings.
Is he not already being forced to save for retirement with his pension? What % do you figure his pension accounts for as savings for retirement? At 65 I figure its worth \~ $1,750,000 at only 3% interest assuming his pensions indexed with inflation.
Interesting. So he really should be doing the calculations himself and figure out what kind of life style he wants. You and I have very different quality of life needs. I imagine he does too.
I’m actually super frugal, so my needs are very little (excluding my HCOL house-related expenses, my monthly expenses are around $1000). I just want a relatively lavish retirement. But yea, maybe for the OP, $4500/month is enough; he needs to work out the math.
Many people need more house during their earning years than their elder years.
Especially if you have kids - more bedrooms, more backyard, better school district. When they grow up you can downsize.
My parents sold their big 4br for a small 1br and pocketed the $1M spread. That goes a long way.
Save for retirement first, then figure out how much home you can afford with what is left. Retirement savings are all about compounding over time, the more you contribute early and the longer it grows the more you end up with. At your income and marriage status you are missing out on a lot of tax savings if you aren't maxing your contributions every year. After you have maxed your contribution, get 6 months of expenses saved in a HYSA for an E fund. You will need it with a house because stuff breaks. You already have way more saved for a down payment than necessary if you take a first time homebuyer loan through the FHA. If you have a gov job then you are putting money into a 457(b) rather than a 401(k), which has different withdrawal rules. [Read this](https://www.fidelity.com/learning-center/smart-money/what-is-a-457b). Good luck.
Personally, I aim for putting about 25% of my income into retirement, including employer match. I don't know how much your salary goes toward the pension program and whether there are employer matches. Assuming it's 10%, then you should put an additional 15% into retirement. **That's roughly 1.25k into retirement.**
You take home about 6k after tax each month. You are looking at roughly 2k in mortgage & tax. So you should have a comfortable amount of room for putting an additional 1.25k into a 2nd retirement account. That'll leave you roughly 3k of spare money. If you feel that's too tight, then decrease the amount to put in retirement.
I made a similar salary as you during my late 30s. My employer offers 7% match. and I put in roughly $800 a month into my 2nd retirement account. But my mortgage/tax/insurance was about 2.6k a month. And I have kids who engaged in competitive sports. So I was pumping my well dry most of the time.
There's a saying. You can't eat your house.
What this means is that when you buy a house your equity is locked in it. You can't use that money. The only way you can access it is by taking out more debt on the house or selling it.
And if you sell it, you still need a place to live.
I think you’re overthinking this a bit. A mortgage is an expense just like rent. When calculating how much you need for retirement you need to know your expenses so you can find your number. Your number being how much you need save so you can live off of it and its proceeds.
For an asset you’ll be living in the home equity is irrelevant except as an emergency rip cord to pull if your plan fails and you need money. You can however calculate when your mortgage will be paid off so you can include that expense reduction in your number.
Dude you have plenty of money to put down on a house. You do need to save more for retirement though. The pension will be great, so if you also get social security, you may be ok, but I would start to pump your retirement savings up a bit.
>Is there a middle road between me trying to make these calculations myself and dropping that much money on a financial planner?
You can check out retirement calculators (for free or very low fees for a custom one).
https://www.financialmentor.com/calculator/best-retirement-calculator
https://walletburst.com/tools/
There's a really interesting Canadian book by Frederick Vettese called The Rule of 30. Vettese is a well qualified writer with books aimed to average middle class people and their finances and retirement. His premise is that you should be putting 30% of your income into some combination of retirement savings, mortgage payments or child expenses. Those expenses of course shift during your lifetime. Once your mortgage is paid off, hopefully in your 50's, you throw a lot more money into your retirement accounts. He has numbers to back this up, and I can see the validity in this. It's not just about building equity in a house you can sell to help finance your retirement (lots of people don't do that anyways), but about decreasing your expenses in retirement. According to Vettese, yes, you can save less for retirement while you're buying or paying off a house.
Late 30s let's assume 40.
First, I don't know if this is what you meant but, you do not retire if you still have a mortgage that means you're retiring at late 60s if you got a 30 year mortgage unless you pay it off early. So the calculations I make are under the assumption you do not have a mortgage to pay and this is your forever home.
After you pay off your mortgage which should be no more than 30% of your gross income +10% repairs and taxes, you will only need the 10% to pay insurance, taxes and repairs. So that brings your cost of living to only 70% as compared to now. Adjust percentages if your mortgage is higher/lower.
Usually in retirement your cost of living reduces because you'll be going out less, will not be saving and you in theory will consume less. If you think this won't apply to you in retirement then keep your cost of living at 70% of current income, otherwise I would say it goes down to 60%. Not factoring in medical costs, if you live a healthy life, have no family history of chronic disease and will retire with good medical insurance (on top of Medicare) I don't think you'll need to factor it in. But if you don't live a healthy lifestyle, don't work out, eat junk, smoke, drink heavily, or have other conditions you need to account for then.
So assuming you only need 60% of your current income to live in retirement that's 5k a month, if you'll have a 4.5k monthly pension that's a gap of 500 a month which you'll need to save 150k for within the next 30 years. Or about 500 a month or 5% of your monthly income.
This is all without accounting inflation if your pension accounts for inflation then you only need to add 3% to your savings to account for inflation or 8% of gross monthly income should be what you save. That's if your wage goes up with or higher than inflation, and your standard of living remains constant, if your wage does not go up with inflation then you have to account for another 3% for a total of 11% retirement savings of whatever your income is until you retire.
If your pension doesn't account for inflation by the time you retire it'll be worth only a quarter so your gap won't be 500, it'll be 3.5k. Which you'll need to save a million by the time you retire to make up for it or 30% of your gross income for the next 30 years, plus 3% to account for inflation, plus another 3% if your wage doesn't go up with inflation.
So your answer is between 8% and 36% depending on inflation adjustments for your wage and pension. You also don't mention any retirement savings you already have besides the pension, so these percentages will be a lot lower if you already have some savings.
As far as social security goes, it's so unpredictable that I don't even account for it. I see my social security money that I may or may not receive the same way the government sees it, as a slush fund. If I don't get it then I already got all my needs covered on my own and if I do get it whatever I'll get will be wasted on fun, gambling, traveling, buying dumb stuff old people buy like premium cable packages to watch matlock reruns all day.
(1) I can't say that paying that $3k will not be worth it. It probably won't be an magic information, but I also feel like a comprehensive check over every 10-15 years could be worth it.
(2) We use "today's" numbers. How much do you spend per month today? Maybe $4,000? (Plus any savings?) Figure that out. . . .
Then, assuming you anticipate keeping the government job and having around $4,500/month at retirement either from that or social security and a partial pension, your could save nothing for retirement.
But, that is a really big assumption. So, lets reduce that for safety. You are only going to expect $2,000 per month. So, you need an additional $24k/year in retirement. To support that at a safe withdrawal rate, you need to have around $600,000 when you want to retire.
Some real rough math suggests that investments in the market double every 7 years or so. If you are planning to retire in, for example 28 years, You'd probably want to have around $75k invested now. But you don't, so you need to keep saving. If you contribute $375/month you get there.
So, my very safe suggestion is you aim to save around $350/month and adjust that for inflation over the next 28 years.
(3) After you do that, how much money do you have to live on? Your income is probably around $5,000/month. You need to save $375, and I just estimated you live on $4,000. So, that gives you around $600/month. I'm going to assume your current rent is like $1,200/month.
So, you can spend $1,800 on a mortgage. To get a payment that works, on current rates, at $275k value, you need to put $90k down. Not ideal if you can only save $600/month.
That gives you 2 options: (a) Buy a cheaper house. Not usually an option, but you know your area. (b) Reduce your other expenses from $2,800+ rent to $2,000+ rent or even $1,500+ rent. I don't know how possible that is, but yeah, that seems doable. That does two things: it gives you more money to save each month, and allows a bigger mortgage payment. If your expenses other than rent are $2,000, you can now afford a mortgage of something like $2,400. You could get that on a $275k house with $40k down!
It also allows you to save faster. So, if you can save $1,400/month, and you save for 10 more months, now your down payment is around $55,000!
You can plug in your numbers. I would not reduce retirement savings, but I think you can do this with retirement savings still going along due to the pension.
>How did you calculate how much to save for retirement with a mortgage?
I subtract the amount I owe from the amount I have. If I have $1,000,000 and owe $200,000, I will have $800,000 to spend when I retire. Although I do plan on moving/selling the house when I retire.
>Is it ok to save less for retirement because I’ll be building equity in a house instead of renting?
Yeah, I guess, home equity is part of your net worth, but of course you can't spend it. You must be willing to convert that to money later on.
But look, a mortgage is an expense just like any other. Food, Netflix, principal, interest, taxes, insurance, and new shoes. All expenses. That's easy enough. Now if you have a lot of equity in your house *and* you're willing to downsize, include that difference in your net worth. While a $1M home won't help you buy groceries, moving to to a small town and a $600k house gives you $400k (or less, minus expenses) of cash. If you're not willing to downsize, then you convert it to cash via reverse mortgage, or you leave $1M worth of house to your estate.
4.5k per month government pension? You are a lucky bastard who needs to do little to plan for your retirement. If you have a house paid for you’ll have even less expenses to worry about.
Of course it’s still prudent to save in case the job ends for whatever reason, you want to retire early or you want to live a more extravagant retirement.
Simplest answer is in your situation you have a lot of flexibility. Don’t sweat every penny. Be smart but don’t be afraid to live a little.
Unless you plan to sell the house or do a reverse mortgage, you shouldn't consider the equity a substitute for retirement savings.
Estimate how much your annual expenses in retirement will be. Subtract any annual pensions or social security you expect to receive. Multiple this number by 25. That's the number of investment savings you ought to be shooting for if you want a good shot of it taking care of your expenses for 30 years post-retiremnit.
E.g. you estimate $60k/yr in expenses post-retirement. You expect a $20k/yr pension/social security when you retire, so you have $40k/yr of expenses you need to account for. $40k*25=$1,000,000 in well-allocated investments needed to last 25-30 yrs minimum.l post-retirement.
How much you should be saving is a function of your expenses and when you wish to retire by. It isn't directly tied to having a mortgage or not.
>Is it ok to save less for retirement because I’ll be building equity in a house instead of renting?
Semantically, it is but more correctly said if you don't you would have to save more. Most calculations assume you aren't renting in retirement. If you are you would need more to cover.
No one knows exactly how much you will need, not even the planners. Good rules of thumb like X times your salary by certain age milestones or the good old 15% should probably be fine.
However,
>Govt job with pension that’s estimated to pay $4.5K/month if I retire at 65
This should factor in. Though usually it goes up over time and as you get promoted, so it is probably more than the equivalent of $4.5k in 25 ish years.
Assuming it is the inflated equivalent of $4.5k and you have no mortgage in 30 years, do you need much more even? I wouldn't stop saving but if you HAD to live on $4.5k a month with only property tax and insurance as your shelter cost I think you could manage.
You just add the mortgage in to what your anticipated monthly expenses will be and that’s what you will need in retirement to cover. Let’s take your pension for example. 4500 a month at 65. Let’s say without a mortgage your anticipated expenses are 1,500 a month. That leaves you with 3k a month. So if you still have a mortgage of 2k, your pension still covers it all but leaves you only a 1k after. This is why even with a low interest rate mortgage, it’s still advised to go into retirement with no mortgage. It just eats up quite a bit of your monthly income.
You have a government pension. You're already "saving" for retirement. Taking a few years to buy a home will almost certainly pay off vs renting at ever higher rates until age 95.
Your current cheap rent won't last. Don't count on it.
Ideally your housing costs (mortgage, taxes, insurance, maintenance) would be 25% ($2083 a month) or less of your gross income. You should always be saving at least 15% of your gross income towards retirement.
I'd recommend buying sooner rather then later. When interest rates do fall, sellers will raise their selling price. You can refinance later when interest rates settle lower.
I don't believe you would benefit much from hiring a financial planner, this situation isn't really that complicated. It seems to me like you're just wanting someone to validate the move.
It's a good move, just make sure you do your due diligence during the buying process. Hire a good inspection company to do a thorough inspection of the house, don't just use the one the realtor gives you, get your own done.
The house doesn’t make much difference to how much you need for retirement, but the pension does.
Home owners pay property tax, insurance, and maintenance costs that continue long past the mortgage. For renters, those costs are included in the monthly rent. Your monthly housing costs will decrease some when the mortgage is paid off, but likely not as much as you hope. Don’t reduce your retirement to buy a house.
Government pensions do make a difference to what you need to save for retirement. Many people say to plan on needing 70-90% of your salary to live on in early retirement. Typically, people need to invest at least 15% of gross salary beginning in their mid-20 in order to retire in mid-60s. But a pension replaces part of your salary, so you can probably invest a little less than 15%. How much less depends on the pension formula, whether the pension has an automatic COLA built in, on whether your government opted out of Social Security, and on the age you want to retire.
Example:
My pension formula will pay 2.3% of my highest annual salary times years of service. I’ll have 26 years in at retirement, so my pension will replace 59.8% of my salary the year I retire. However, my pension doesn’t have a COLA, so I need some investments to handle inflation during retirement.
My government employer withholds Social Security taxes from my pay, so I will not have SS reduced by the GPO/WEP provision for government employees whose employers opted out of SS. Based on the MySocialSecurity calculator, SS will replace about 35% of my salary. With the SS Trust Fund projected to run out around 2035, I am planning on actually receiving enough to replace 25% of my salary.
My pension is reduced if I start drawing it before age 65. My SS is reduced if I start drawing it before age 67. I plan to retire between ages 62 and 65, so I’ll need some investments to bridge the gap between retirement and drawing those monthly checks. With about 85% of my salary being replaced by pensions and SS, I figure I need to invest about 10% of my salary to be able to retire a little early and to cover inflation during retirement.
To me, retirement comes before everything else.
When the paychecks hit the account, first thing they go to are retirement accounts. Here's how we saved for our down payment and also a good trial period to see if we can afford it.
Our rent was $1k, we figured with the house we wanted, mortgage is gonna be around $2500.
So take $2500-$1k rent and then add $500 for utilities+odds and ends = $2k a month.
We started saving $2k a month, this number doesn't change, it doesn't go down lower just because you want it to, it's to mimic having a $2500 mortgage. Go for a year or 2, you'll know if you can afford the payments.
Is your advice to rent forever? He's asking how to balance saving for retirement while saving for a home. Buying, in the long run (decades), is probably cheaper.
I'm not sure I understand the question.
Step 1: Max 401k deferral
Step 2: Figure out what mortgage payment is affordable based on net pay and other lifestyle expenses.
Step 3: Buy house.
Go for the house, you’ve got plenty of time left to work and earn that awesome govt pension … that’ll afford you a much nicer house even then.
Otherwise a spreadsheet is the way to go, only needs simple math to calculate your annual net balance of all income minus expenses, then use the fill handle to forecast all future years, then each future year can be tailored to study various scenarios. You never need to deal with replacing or paying for any 3rd party tool your whole life.
I would not have taken on a mortgage that wouldn't allow me to max out retirement. I need to always be able to max out retirement, so if I couldn't afford a mortgage, I would keep saving until it made sense.
Save your money. Post your numbers here and someone will give you some sound advice
Ok thanks I just did
Do you have no other retirement savings besides the deferred comp and pension (no ss (asking because I’m a government worker who doesn’t contribute to ss), 401k or similar, IRA)?
>Is it ok to save less for retirement because I’ll be building equity in a house instead of renting? Uhhhh, not to me it isn't. You're building equity sure, but houses come with other expenses (and pricy ones at that) which don't typically come with renting, and accessing your equity requires more debt unless you sell outright. You have to be able to do both things: rent AND save for retirement, or buy AND save for retirement. Saving for retirement isn't really the optional thing that gets sacrificed so you can do other things. You would typically want to find the money for your down payment by reducing your other expenses. I don't know how old you are, but time in the market is the most important advantage you have right now. Another thing you can do is a trial budget; figure out what the mortgage, insurance, taxes, utilities, repairs (typically 1-2% of the home's value annually), etc. would be on the home you want. The difference between that and your current rent/utilities is what you have to set aside each month and not spend. Run that experiment for 6-12 months and see how comfortable (or not) that is. I will give you an idea of what living with a home purchase will do to your lifestyle without locking you into a 30 year mortgage. Maybe if you post your income, expenses, current contributions to retirement, what you currently have saved and what vehicle (401k, HYSA, etc.), age, it might be easier to give more solid advice.
Thanks for the guidance. I just added my details to the post
A rule of thumb is that your monthly housing payments should be no more than 28% of your monthly gross. Your retirement savings should be about 15%. Don’t count home equity as part of your retirement savings.
When you mention very affordable rent, that's indicative to me that you should keep renting. Simple as that.
It’s OK to save less for retirement because you’ll be building equity in a house if you plan to sell your house later on to fund your retirement. Because otherwise, why does house equity matter in terms of your retirement? Personally, I think you should still be able to save 15% of your income towards retirement after all other expenses. If you can’t, then you probably over stretched somewhere.
I dont really understand this take. Generally, you need a place to live and historically places to live get more expensive with time, not less. Even downgrading later typically doesnt result in mich of a reduction. I never factor house equity in retirement savings
He was asking if it made sense to build equity in a house he owned in lieu of saving for retirement. It doesn’t; one should be doing both and especially not sacrifice the latter for the former. I understand that if he buys a house, at some point he will no longer have to pay for a mortgage or rent, which is a large (most times the largest) expense one has. But the OP wasn’t asking about that; he wanted to know how to balance home ownership and retirement savings.
Is he not already being forced to save for retirement with his pension? What % do you figure his pension accounts for as savings for retirement? At 65 I figure its worth \~ $1,750,000 at only 3% interest assuming his pensions indexed with inflation.
More like $1.35M. I’m going to guess very small, like 3-4%. I’m basing this on the fact that my pension is 3x what his is and I contribute 11-12%.
Interesting. So he really should be doing the calculations himself and figure out what kind of life style he wants. You and I have very different quality of life needs. I imagine he does too.
I’m actually super frugal, so my needs are very little (excluding my HCOL house-related expenses, my monthly expenses are around $1000). I just want a relatively lavish retirement. But yea, maybe for the OP, $4500/month is enough; he needs to work out the math.
Because if you live in a high cost market you can sell your house for millions and move to a low cost market when you are retired.
Many people need more house during their earning years than their elder years. Especially if you have kids - more bedrooms, more backyard, better school district. When they grow up you can downsize. My parents sold their big 4br for a small 1br and pocketed the $1M spread. That goes a long way.
Save for retirement first, then figure out how much home you can afford with what is left. Retirement savings are all about compounding over time, the more you contribute early and the longer it grows the more you end up with. At your income and marriage status you are missing out on a lot of tax savings if you aren't maxing your contributions every year. After you have maxed your contribution, get 6 months of expenses saved in a HYSA for an E fund. You will need it with a house because stuff breaks. You already have way more saved for a down payment than necessary if you take a first time homebuyer loan through the FHA. If you have a gov job then you are putting money into a 457(b) rather than a 401(k), which has different withdrawal rules. [Read this](https://www.fidelity.com/learning-center/smart-money/what-is-a-457b). Good luck.
Thank you!
Personally, I aim for putting about 25% of my income into retirement, including employer match. I don't know how much your salary goes toward the pension program and whether there are employer matches. Assuming it's 10%, then you should put an additional 15% into retirement. **That's roughly 1.25k into retirement.** You take home about 6k after tax each month. You are looking at roughly 2k in mortgage & tax. So you should have a comfortable amount of room for putting an additional 1.25k into a 2nd retirement account. That'll leave you roughly 3k of spare money. If you feel that's too tight, then decrease the amount to put in retirement. I made a similar salary as you during my late 30s. My employer offers 7% match. and I put in roughly $800 a month into my 2nd retirement account. But my mortgage/tax/insurance was about 2.6k a month. And I have kids who engaged in competitive sports. So I was pumping my well dry most of the time.
Don't pay someone $3k for a comprehensive consultation of your finances. That's insane.
There's a saying. You can't eat your house. What this means is that when you buy a house your equity is locked in it. You can't use that money. The only way you can access it is by taking out more debt on the house or selling it. And if you sell it, you still need a place to live.
I think you’re overthinking this a bit. A mortgage is an expense just like rent. When calculating how much you need for retirement you need to know your expenses so you can find your number. Your number being how much you need save so you can live off of it and its proceeds. For an asset you’ll be living in the home equity is irrelevant except as an emergency rip cord to pull if your plan fails and you need money. You can however calculate when your mortgage will be paid off so you can include that expense reduction in your number.
Dude you have plenty of money to put down on a house. You do need to save more for retirement though. The pension will be great, so if you also get social security, you may be ok, but I would start to pump your retirement savings up a bit.
>Is there a middle road between me trying to make these calculations myself and dropping that much money on a financial planner? You can check out retirement calculators (for free or very low fees for a custom one). https://www.financialmentor.com/calculator/best-retirement-calculator https://walletburst.com/tools/
This is so helpful, thanks for sharing these!
There's a really interesting Canadian book by Frederick Vettese called The Rule of 30. Vettese is a well qualified writer with books aimed to average middle class people and their finances and retirement. His premise is that you should be putting 30% of your income into some combination of retirement savings, mortgage payments or child expenses. Those expenses of course shift during your lifetime. Once your mortgage is paid off, hopefully in your 50's, you throw a lot more money into your retirement accounts. He has numbers to back this up, and I can see the validity in this. It's not just about building equity in a house you can sell to help finance your retirement (lots of people don't do that anyways), but about decreasing your expenses in retirement. According to Vettese, yes, you can save less for retirement while you're buying or paying off a house.
Late 30s let's assume 40. First, I don't know if this is what you meant but, you do not retire if you still have a mortgage that means you're retiring at late 60s if you got a 30 year mortgage unless you pay it off early. So the calculations I make are under the assumption you do not have a mortgage to pay and this is your forever home. After you pay off your mortgage which should be no more than 30% of your gross income +10% repairs and taxes, you will only need the 10% to pay insurance, taxes and repairs. So that brings your cost of living to only 70% as compared to now. Adjust percentages if your mortgage is higher/lower. Usually in retirement your cost of living reduces because you'll be going out less, will not be saving and you in theory will consume less. If you think this won't apply to you in retirement then keep your cost of living at 70% of current income, otherwise I would say it goes down to 60%. Not factoring in medical costs, if you live a healthy life, have no family history of chronic disease and will retire with good medical insurance (on top of Medicare) I don't think you'll need to factor it in. But if you don't live a healthy lifestyle, don't work out, eat junk, smoke, drink heavily, or have other conditions you need to account for then. So assuming you only need 60% of your current income to live in retirement that's 5k a month, if you'll have a 4.5k monthly pension that's a gap of 500 a month which you'll need to save 150k for within the next 30 years. Or about 500 a month or 5% of your monthly income. This is all without accounting inflation if your pension accounts for inflation then you only need to add 3% to your savings to account for inflation or 8% of gross monthly income should be what you save. That's if your wage goes up with or higher than inflation, and your standard of living remains constant, if your wage does not go up with inflation then you have to account for another 3% for a total of 11% retirement savings of whatever your income is until you retire. If your pension doesn't account for inflation by the time you retire it'll be worth only a quarter so your gap won't be 500, it'll be 3.5k. Which you'll need to save a million by the time you retire to make up for it or 30% of your gross income for the next 30 years, plus 3% to account for inflation, plus another 3% if your wage doesn't go up with inflation. So your answer is between 8% and 36% depending on inflation adjustments for your wage and pension. You also don't mention any retirement savings you already have besides the pension, so these percentages will be a lot lower if you already have some savings. As far as social security goes, it's so unpredictable that I don't even account for it. I see my social security money that I may or may not receive the same way the government sees it, as a slush fund. If I don't get it then I already got all my needs covered on my own and if I do get it whatever I'll get will be wasted on fun, gambling, traveling, buying dumb stuff old people buy like premium cable packages to watch matlock reruns all day.
Thank you so much for your thorough response. I also wondered about how inflation will impact the estimated pension so I will ask.
A house is not an investment vehicle.
Sorry, maybe stupid question but will you get social security? in addition to that pension.
We used the Fidelity Retirement online planner. It has fields to calculate a mortgage into retirement planning, along with a pay off date.
(1) I can't say that paying that $3k will not be worth it. It probably won't be an magic information, but I also feel like a comprehensive check over every 10-15 years could be worth it. (2) We use "today's" numbers. How much do you spend per month today? Maybe $4,000? (Plus any savings?) Figure that out. . . . Then, assuming you anticipate keeping the government job and having around $4,500/month at retirement either from that or social security and a partial pension, your could save nothing for retirement. But, that is a really big assumption. So, lets reduce that for safety. You are only going to expect $2,000 per month. So, you need an additional $24k/year in retirement. To support that at a safe withdrawal rate, you need to have around $600,000 when you want to retire. Some real rough math suggests that investments in the market double every 7 years or so. If you are planning to retire in, for example 28 years, You'd probably want to have around $75k invested now. But you don't, so you need to keep saving. If you contribute $375/month you get there. So, my very safe suggestion is you aim to save around $350/month and adjust that for inflation over the next 28 years. (3) After you do that, how much money do you have to live on? Your income is probably around $5,000/month. You need to save $375, and I just estimated you live on $4,000. So, that gives you around $600/month. I'm going to assume your current rent is like $1,200/month. So, you can spend $1,800 on a mortgage. To get a payment that works, on current rates, at $275k value, you need to put $90k down. Not ideal if you can only save $600/month. That gives you 2 options: (a) Buy a cheaper house. Not usually an option, but you know your area. (b) Reduce your other expenses from $2,800+ rent to $2,000+ rent or even $1,500+ rent. I don't know how possible that is, but yeah, that seems doable. That does two things: it gives you more money to save each month, and allows a bigger mortgage payment. If your expenses other than rent are $2,000, you can now afford a mortgage of something like $2,400. You could get that on a $275k house with $40k down! It also allows you to save faster. So, if you can save $1,400/month, and you save for 10 more months, now your down payment is around $55,000! You can plug in your numbers. I would not reduce retirement savings, but I think you can do this with retirement savings still going along due to the pension.
Thank you for your thoughtful response, I really appreciate it!
>How did you calculate how much to save for retirement with a mortgage? I subtract the amount I owe from the amount I have. If I have $1,000,000 and owe $200,000, I will have $800,000 to spend when I retire. Although I do plan on moving/selling the house when I retire. >Is it ok to save less for retirement because I’ll be building equity in a house instead of renting? Yeah, I guess, home equity is part of your net worth, but of course you can't spend it. You must be willing to convert that to money later on. But look, a mortgage is an expense just like any other. Food, Netflix, principal, interest, taxes, insurance, and new shoes. All expenses. That's easy enough. Now if you have a lot of equity in your house *and* you're willing to downsize, include that difference in your net worth. While a $1M home won't help you buy groceries, moving to to a small town and a $600k house gives you $400k (or less, minus expenses) of cash. If you're not willing to downsize, then you convert it to cash via reverse mortgage, or you leave $1M worth of house to your estate.
That’s what I wanna do sell and have a little shack by the ocean 300sq ft baby!
4.5k per month government pension? You are a lucky bastard who needs to do little to plan for your retirement. If you have a house paid for you’ll have even less expenses to worry about. Of course it’s still prudent to save in case the job ends for whatever reason, you want to retire early or you want to live a more extravagant retirement. Simplest answer is in your situation you have a lot of flexibility. Don’t sweat every penny. Be smart but don’t be afraid to live a little.
4.5k per month in 2055 dollars will NOT be a lot. Maybe enough for essentials only. Probably around low 1k or so...
Unless you plan to sell the house or do a reverse mortgage, you shouldn't consider the equity a substitute for retirement savings. Estimate how much your annual expenses in retirement will be. Subtract any annual pensions or social security you expect to receive. Multiple this number by 25. That's the number of investment savings you ought to be shooting for if you want a good shot of it taking care of your expenses for 30 years post-retiremnit. E.g. you estimate $60k/yr in expenses post-retirement. You expect a $20k/yr pension/social security when you retire, so you have $40k/yr of expenses you need to account for. $40k*25=$1,000,000 in well-allocated investments needed to last 25-30 yrs minimum.l post-retirement. How much you should be saving is a function of your expenses and when you wish to retire by. It isn't directly tied to having a mortgage or not.
Brokerages like Fidelity offer tools for this. Check it out.
>Is it ok to save less for retirement because I’ll be building equity in a house instead of renting? Semantically, it is but more correctly said if you don't you would have to save more. Most calculations assume you aren't renting in retirement. If you are you would need more to cover. No one knows exactly how much you will need, not even the planners. Good rules of thumb like X times your salary by certain age milestones or the good old 15% should probably be fine. However, >Govt job with pension that’s estimated to pay $4.5K/month if I retire at 65 This should factor in. Though usually it goes up over time and as you get promoted, so it is probably more than the equivalent of $4.5k in 25 ish years. Assuming it is the inflated equivalent of $4.5k and you have no mortgage in 30 years, do you need much more even? I wouldn't stop saving but if you HAD to live on $4.5k a month with only property tax and insurance as your shelter cost I think you could manage.
You just add the mortgage in to what your anticipated monthly expenses will be and that’s what you will need in retirement to cover. Let’s take your pension for example. 4500 a month at 65. Let’s say without a mortgage your anticipated expenses are 1,500 a month. That leaves you with 3k a month. So if you still have a mortgage of 2k, your pension still covers it all but leaves you only a 1k after. This is why even with a low interest rate mortgage, it’s still advised to go into retirement with no mortgage. It just eats up quite a bit of your monthly income.
You have a government pension. You're already "saving" for retirement. Taking a few years to buy a home will almost certainly pay off vs renting at ever higher rates until age 95. Your current cheap rent won't last. Don't count on it.
Ideally your housing costs (mortgage, taxes, insurance, maintenance) would be 25% ($2083 a month) or less of your gross income. You should always be saving at least 15% of your gross income towards retirement. I'd recommend buying sooner rather then later. When interest rates do fall, sellers will raise their selling price. You can refinance later when interest rates settle lower. I don't believe you would benefit much from hiring a financial planner, this situation isn't really that complicated. It seems to me like you're just wanting someone to validate the move. It's a good move, just make sure you do your due diligence during the buying process. Hire a good inspection company to do a thorough inspection of the house, don't just use the one the realtor gives you, get your own done.
The house doesn’t make much difference to how much you need for retirement, but the pension does. Home owners pay property tax, insurance, and maintenance costs that continue long past the mortgage. For renters, those costs are included in the monthly rent. Your monthly housing costs will decrease some when the mortgage is paid off, but likely not as much as you hope. Don’t reduce your retirement to buy a house. Government pensions do make a difference to what you need to save for retirement. Many people say to plan on needing 70-90% of your salary to live on in early retirement. Typically, people need to invest at least 15% of gross salary beginning in their mid-20 in order to retire in mid-60s. But a pension replaces part of your salary, so you can probably invest a little less than 15%. How much less depends on the pension formula, whether the pension has an automatic COLA built in, on whether your government opted out of Social Security, and on the age you want to retire. Example: My pension formula will pay 2.3% of my highest annual salary times years of service. I’ll have 26 years in at retirement, so my pension will replace 59.8% of my salary the year I retire. However, my pension doesn’t have a COLA, so I need some investments to handle inflation during retirement. My government employer withholds Social Security taxes from my pay, so I will not have SS reduced by the GPO/WEP provision for government employees whose employers opted out of SS. Based on the MySocialSecurity calculator, SS will replace about 35% of my salary. With the SS Trust Fund projected to run out around 2035, I am planning on actually receiving enough to replace 25% of my salary. My pension is reduced if I start drawing it before age 65. My SS is reduced if I start drawing it before age 67. I plan to retire between ages 62 and 65, so I’ll need some investments to bridge the gap between retirement and drawing those monthly checks. With about 85% of my salary being replaced by pensions and SS, I figure I need to invest about 10% of my salary to be able to retire a little early and to cover inflation during retirement.
To me, retirement comes before everything else. When the paychecks hit the account, first thing they go to are retirement accounts. Here's how we saved for our down payment and also a good trial period to see if we can afford it. Our rent was $1k, we figured with the house we wanted, mortgage is gonna be around $2500. So take $2500-$1k rent and then add $500 for utilities+odds and ends = $2k a month. We started saving $2k a month, this number doesn't change, it doesn't go down lower just because you want it to, it's to mimic having a $2500 mortgage. Go for a year or 2, you'll know if you can afford the payments.
That’s a great way to test out a mortgage payment without committing, thanks for the idea!
Do not spend money for someone else’s opinion on your finances. It’s a waste of money.
OP. I paid off my mortgage 20 years ago and never plan to have a mortage in retirement. If you do, its like a milstone around your (retirement) neck.
Is your advice to rent forever? He's asking how to balance saving for retirement while saving for a home. Buying, in the long run (decades), is probably cheaper.
I'm not sure I understand the question. Step 1: Max 401k deferral Step 2: Figure out what mortgage payment is affordable based on net pay and other lifestyle expenses. Step 3: Buy house.
Go for the house, you’ve got plenty of time left to work and earn that awesome govt pension … that’ll afford you a much nicer house even then. Otherwise a spreadsheet is the way to go, only needs simple math to calculate your annual net balance of all income minus expenses, then use the fill handle to forecast all future years, then each future year can be tailored to study various scenarios. You never need to deal with replacing or paying for any 3rd party tool your whole life.
I would not have taken on a mortgage that wouldn't allow me to max out retirement. I need to always be able to max out retirement, so if I couldn't afford a mortgage, I would keep saving until it made sense.