Saving

Raiding retirement accounts to buy a home can 'put your future at risk,' expert says

Alizah Salario
Twenty/20

To save for a down payment on a new home, some millennials are getting creative, according to a recent survey of prospective homebuyers from Bankrate.com. But one of their strategies in particular, experts worry, may be shortsighted, and even risky.

Bankrate polled 2,582 adults, including 789 millennials ages 23-38, and asked participants how they are funding their down payments and closing costs. Respondents could pick multiple answers. Over half, or 53%, of millennials say they're saving. Some are taking more drastic steps: 14% say they've moved in with family or friends to cut down on expenses, and 12% are selling personal items such as jewelry, cars, or electronics.

And 13% of millennial respondents say they're tapping their retirement accounts, as compared to 8% and 7% of Gen Xers and baby boomers.

How people find the money to buy homes
Millennials tend to use more sources to fund the down payment and closing costs on their first homes than other generations.
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Note: Respondents could choose more than one answer.
kiersten schmidt/grow Bankrate

Here's why experts suggest you think twice before dipping into your retirement fund.

Putting 'your future at risk'

"Tapping into retirement savings is a risky move that can put your future at risk," says Deborah Kearns, a mortgage analyst for Bankrate.

"By and large, homeownership has long been touted as the way you build wealth," she says. "While that's still true to some extent, you can't overextend yourself to make that happen."

Mark LaSpisa, a certified financial planner and president of Vermillion Financial Advisors in South Barrington, Illinois, agrees. While there may be some cases in which putting equity from retirement savings into a home may make sense, the "psychological, habit-forming" component of drawing down from your retirement savings is a concern, too: "It's easy to think, 'I broke the seal, and now I can go in and raid my IRA for any reason,'" he says.

By and large, homeownership has long been touted as the way you build wealth. While that's still true to some extent, you can't overextend yourself to make that happen.
Deborah Kearns
mortgage analyst, Bankrate.com

Generally, when you pull from a retirement account before you reach age 59½, your withdrawal is considered an "early" or "premature" distribution. That means the money is subject to taxes and a 10% penalty.

Traditional and Roth IRAs make an exception for first-time homebuyers, letting you avoid those consequences. But even if you're not incurring additional costs in the short-term, you may well be setting yourself back over the long term.

Let's say you decide to take $10,000 out of your retirement account to put toward a first-home purchase, and you're 32, the average age of first-time buyers. If you instead left that money in the account and it saw average returns of 8% over the next 33 years until you retire at 65, those funds would have grown to more than $126,700.

But growing your retirement savings thanks to compounding interest is only part of why experts recommend leaving that $10,000 alone. If you chip away now at what you've already saved, you might find it harder to stay on track later with your retirement goals, should you experience a job loss or other financial emergency that affects your ability to save.

For all of these reasons, Suze Orman's advice is to leave the money in your retirement accounts alone. "Do not take a loan, do not make withdrawals, do not touch your retirement accounts," Orman told CNBC Make It last year. "Because if you think you need that money now, I'm here to tell you you're going to need it even more later on in life when you no longer have a paycheck coming in."

VIDEO4:1404:14
How to make your home-buying dream a reality

Taking the long view

Although millennials recently became the largest group of homebuyers in America, according to the National Association of Realtors, many of them still face challenges when it comes to being able to afford real estate. Some 45% of prospective millennial homebuyers say that the cost of living is one of the biggest obstacles in saving for a home, and 23% say student loans are holding them back, according to the Bankrate survey.

If you can't afford a down payment on a home in the near future, don't worry, says Kearns. Keep looking at the big picture.

"When you're a Gen Xer or boomer, you have equity to buy your home, or you're further along in your career," says Kearns. "Not only can [millennials] not put as much down, they're also just struggling to have [savings like] an emergency fund. You don't want to deplete that just to buy a home."

The desire to own a home runs deep for many Americans, and the high cost of housing can cause a kind of "psychological fatigue," says Kearns. But if you have to rent for a few more years and put off buying a house, that's OK. For some people, it's even a better choice: One recent study found that about half of millennial homebuyers ended up with regrets.

"You have to take a little of the emotion out," Kearns says, "and just be very practical."

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