Should You Raid Your Retirement Account to Buy a Home?

Left to grow, a retirement account can enhance your future.

If you're buying a home and are worried that you don't have enough money to use as a down payment or to compete with other home buyers, you may wonder if you should raid your retirement account to grab the extra cash.

The answer is almost always no. Here's why.

It's a "today" problem

The current sizzling-hot housing market is temporary. We don't know when it will cool off, but economics has taught us that what goes up tends to come down. Either it slows as the Federal Reserve continues to raise interest rates or it softens as more homes hit the market. It stands to reason that housing prices will normalize at some point.

Raiding your future to take care of a problem you're experiencing today can be a costly mistake.

Bad advisors

Years ago, I interviewed a loan officer in Northern California. This lender told me that he frequently advises people to empty their IRAs, 401ks, and other retirement accounts to purchase California real estate. When I asked how he could make such a suggestion, he said, "Real estate values in California will always increase in value."

If you've bought into the notion that buying a house provides you with an asset guaranteed to increase in value, I ask you to consider a few "what ifs."

What if?

What if a natural disaster hits your neighborhood and some of your neighbors are unable to rebuild? What happens to the value of your home when the area is a mess?

What if someone down the street begins making drugs in their basement, the media report their arrest, and your neighborhood is suddenly considered unsafe?

What if the school district you're located in loses accreditation or students begin to perform poorly on standardized tests? Even if you don't have kids in school, the local school district's reputation can seriously impact your home's value.

Yes, the value of your retirement account will rise and fall, and that may feel just as risky as a home losing value. The difference is that history has illustrated how well the stock market performs following the disappointment of a bear market. The same cannot be said for a neighborhood that falls on hard times. Typically, those who can afford to leave move out of the neighborhood, and those left behind are stuck with stagnant home values.

It's tough to outpace compound interest

Let's say you're 35 years old and decide to take $40,000 out of a retirement account to buy a house. If you'd left the money in the retirement account, paying an average of 7%, in 32 years (when you reach full retirement age), it would be worth $348,611.

None of us should expect the enormous jump in home values we've experienced over the past two years to become the norm. It was the combination of historically low interest rates meant to stimulate the economy, coupled with a meager housing inventory that produced inflated prices.

Typically, homes appreciate by 3.5% to 3.8% per year. While steady growth sounds nice, it's important to factor in how much money is poured back into the property through home repairs, general maintenance, insurance, and property taxes.

Questions to ask yourself

Before making a final decision, ask yourself the following:

• Am I comfortable with how much I've saved for retirement so far?
• Am I willing to give up the money my account would have earned through compound interest?
• Do I have a plan to turbo-charge my retirement fund so I can enjoy my golden years?
• Am I likely to regret trading future financial security for something I want today?
• Does it make more sense to save money and wait until the market has stabilized to buy a home?

Taking money from a retirement account is always a big deal and a decision that should not be taken lightly. If you weigh your options and still aren't sure, check in with your financial advisor for their take on the situation.