Dear Dr. Don,
I am wondering if it’s a good idea to use a portion of your retirement savings to purchase a home. If someone has never owned a home, is about age 60 and has rolled over a 401(k) plan into IRA CDs, would it be a good idea to take about one-fourth of their retirement money and use it for the down payment on a home?
Let’s say the retirement savings are about $150,000. It’s not a lot, but if the person is still working, hey would have a little more time to work and put it toward the home. For a single person, who never was able to own a home, would this be a good idea?
— Jan Jump-start
Just as a convenience to me, rather than making it a hypothetical situation, let’s say that the scenario you describe reflects your situation. If you aren’t yet 59½, raiding the retirement accounts requires a lengthier discussion. So, in your case, I’ll assume that “about age 60” is actually over 60.
There are a lot of things to consider in making this decision. One of the more important variables is what’s going on in the housing market where you plan to buy. Home mortgage rates are very low. In most markets, it’s still a buyer’s market, and you may be able to find a home to purchase that would allow you to build equity in the home. Qualifying for the first-time homebuyer tax credit in the first quarter of this year also affects the economics of your decision.
Another important consideration is how long you plan to live in the area. Do you plan to retire “in place” or do you anticipate moving after you retire? Besides moving expenses, homeowners face other costs, including mortgage closing costs, property taxes, homeowners insurance, and home maintenance and repair costs. Bankrate’s “Buy or rent your next home?” calculator will also provide some guidance.
You’d want to do a little forensics on your financial history and a little soul searching on this goal. Why has it taken you until your 60s to consider buying your first home, and why is it important to you now?
I’m really reluctant to advise people to raid their retirement accounts, especially prior to retirement, to achieve financial goals that may or may not relate to retirement. Certainly you need shelter, but you’ve gone your whole life without owning a home. Why does it become a goal now?
I’m a strong proponent of maintaining financial flexibility. Raiding your retirement accounts prior to retirement will reduce that flexibility. In your case, you’re not talking about rebuilding the retirement account while you’re still employed, but paying down the mortgage. I encourage people to work toward paying off the mortgage as a preretirement goal, but taking on a mortgage in your 60s makes that goal quite difficult.
Since paying off the mortgage prior to retirement will be a difficult task, you’d want to consider the adequacy of your retirement income in meeting your living expenses, including the mortgage payment, property taxes, homeowners insurance, home maintenance and upkeep. You mentioned retirement accounts, but not any other sources of retirement income. Will you get a pension? How much do you expect to receive in Social Security? Do you have savings other than your retirement accounts? You don’t want to be “house rich” and “cash poor” in retirement.
If you decide that homeownership is the right decision for you, consider an FHA loan — which requires a much smaller down payment (typically 3 percent) — as an alternative to cashing out 25 percent of your retirement accounts to buy a home. The Department of Housing and Urban Development, or HUD, Web page, “Buying a Home,” covers this ground and more.
Keep in mind that IRA CDs often have early withdrawal penalties, and you don’t want to pay a penalty on top of the income taxes you’ll owe when you take a distribution out of the IRA account.
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