I have what would be considered a high-quality problem. Last Dec, I started a great job with a great company. Excellent benefits, nice co-workers, etc… I took the job even though I knew the 3 hr round trip commute would be too much for me with the mindset that I would move closer. Now that I have examined the housing market and my finances, I fear that I can either save for retirement or buy a house closer to my workplace but not both.
Current house worth conservatively: $275,000
Owe Home EQ Line of credit: $18,500
Retirement Savings: $170,000
401K per year contribution: $24,500
Potential New House: $350,000 to $425,000 (Not that many listings fall into the range I’m looking at…typical prices for the area near workplace in the $450,000 – $525,000 range)
Any suggestions would be appreciated.
The way I see it, you’ve got options. Those options, however, may not be the ones you expect, or maybe even hope for. Each of the options, however, will set you up to be in a better position in 10 years than you are in today.
First, let’s cover the good. You’re doing a really good job saving for retirement. Excellent, even. You’re currently maxing out your 401(k) contributions and taking full advantage of the 55-and-over catch-up provision. I have to assume that your employer is matching a portion of your contributions which makes it entirely likely that you’re saving between $27,500 and $30,000 into your 401(k) annually. Great job!
Additionally, based on your 401(k) contributions alone, you’ve got a Power Percentage™ of 25%, which places you pretty squarely in the “Good” category. Depending on a few other factors, you could be creeping up to entering the “Great” range that begins at 35%. If you’re unfamiliar with Power Percentage™, it’s a metric that we developed a few years ago that helps determine how dependent you are on your income. Without tipping my hand too much, this number is going to be important to you.
The predicament you’re faced with pits two basic financial actions squarely against one another, saving vs spending. When you originally accepted your job last winter, you knew that you didn’t want to drive a 3-hour round-trip commute (understandable) every day. The intended solution was to simply move closer to work when the commute became too much. Now that you’ve looked at the housing market, the commute may look a little better, and spending a good chunk of money on a new house, not so much.
Selling your current home and buying a home closer to work would drastically increase the amount of money you spend on housing each month, potentially blowing up the housing portion of your budget. Not only that, but it would obligate you to a higher payment for a longer period of time, requiring more income each month well into retirement. That obligation will have considerable effects on your retirement lifestyle.
With that in mind, unless you’ve left some assets out of your inventory, you’re behind on retirement savings. If you continue to work at your current job and max out your 401(k) contributions (not including any employer match), you’ll end up with around $750,000 for retirement in 10 years if you figure on an 8% annual return. That $750,000 has the potential to provide a reasonably safe/consistent monthly income of about $1,750. After inflation, that will feel like $1,370 in today’s money. I’m betting that figure is equal parts eye-opening and disappointing, with a dash of anxiety tossed in for flavor.
Knowing that bit of information, you should ask yourself if increasing your expenses by moving into a more expensive house with roughly 10 years until retirement is the appropriate choice (it’s not). In fact, you should seriously consider doing just the opposite. First, pay off the home equity line of credit. The sooner the better. Once you’ve eliminated the obligation, use the cash flow you were directing towards the HELOC to do one of two things:
1) If you don’t have an emergency fund of 3 months expenses, now is a great time to establish one. Emergency funds are not only crucial while you’re working, but incredibly valuable in retirement, as well. They allow you to stay calm when life comes knocking on the door and the unexpected happens. Having a buffer of cash to fall back on creates a feeling of additional control and independence. Don’t underestimate the importance of an emergency fund.
2) Open a Roth IRA and try to max it out. By increasing the amount you save each month, you’re going to accomplish two things. First, you’ll save more money for retirement (obvious, I know…), and second, you’ll become less dependent on your income. If you’re less dependent on your income, you’re not spending as much money, which works well for you in the long run.
And that’s the key, here. You’re doing a really good job saving for retirement and if you can focus on reducing your dependency on your income (reducing month-to-month expenses), your current and future retirement savings will last longer. That brings us back quite nicely to Power Percentage. The higher you can drive your number, either through saving, paying off debt, or reducing expenses so you can save/pay off debt, the less income you need to succeed in retirement. Reducing expenses to enhance your retirement savings is an entirely plausible retirement strategy, and one more people will need to consider this approach in coming years.
So, your first option is to keep on doing what you’re doing with a few small-ish changes and deal with the drive as much as possible.
The second option is to find a new job closer to home and adjust your current lifestyle and future plans accordingly if your new job doesn’t pay as well. With this option, the drive is reduced and you stay in your current home, but there are other variables to consider. Will you be able to continue maxing out your 401(k)? Will you be able to redirect the money you save in fuel due to a shorter commute to savings or debt reduction? Will a shorter commute make working beyond full retirement age for Social Security possible or maybe even attractive? Each of these questions (and others) will have a direct impact on your future plans. None of the questions should prevent you from going with this option, they just need to be realized and addressed. At this stage of the game, it’s better for you to be as informed about your options as you can be.
In conclusion, I don’t think buying a more costly house at the expense of your retirement savings is a prudent decision. Look for a solution that allows you to continue your aggressive retirement contributions while still coming to a conclusion about your commute. What’s the right answer for you?
Damian is the lead Financial Concierge on Your Money Line, the financial help line serving all Pete the Planner® Financial Wellness clients. Damian is a CERTIFIED FINANCIAL PLANNER™ professional and loves answering your money questions. Despite sharing a last name and sense of humor, Damian and Pete are not related.