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Almost 1 in 3 Millennials using retirement money to finance homes

Almost 1 in 3 Millennials using retirement money to finance homes

 

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When you’re a cash-strapped aspiring homeowner, you may start digging through all your emergency funds to get the home of your dreams. In fact, a new Bank of the West’s survey of over 600 Americans ages 21-34 found that nearly 1 in 3 Millennial homeowners have used their retirement funds as down payments for their home.

When you’re a cash-strapped aspiring homeowner, you may start digging through all your emergency funds to get the home of your dreams. In fact, a new Bank of the West’s survey of over 600 Americans ages 21-34 found that nearly 1 in 3 Millennial homeowners have used their retirement funds as down payments for their home.

The survey found that Millennials are willing to sacrifice their far-off future for their homeowner dream of the present. Fifty-six percent of Millennials said that owning a home was a bigger priority than paying off debt or retiring comfortably. Is borrowing from your retirement a smart move? Experts have mixed feelings about this decision.

Pros and cons of using retirement savings for buying a home

The pros of using retirement money is dependent on if your home is a good investment or not. How long are you planning to stay in your home? Is this house in an up-and-coming neighborhood? What are rental prices like in your local area? These are questions that Abby Hayes, a personal finance blogger who has written for The Dough Roller, said that you should ask yourself before you withdraw retirement money.

But the big downside is that you are risking your future financial security. That’s why Bank of the West finds this trend “alarming.” Once you take money out of your retirement account, it can be too hard for you to catch up on payments later on. “Millennials are so eager to become homeowners that some may be inadvertently cutting off their nose to spite their face,” Ryan Bailey, Head of the Retail Banking Group at Bank of the West, said. “To avoid buyer’s remorse, Millennials should cover their bases and kick the proverbial tires—reflecting on their physical and financial wishes for a home before they sign on the dotted line.”

Weigh the decision of each investment carefully before you ink the deal. Take it from homeowners who regretted their decision. Forty-one percent of Millennials surveyed said their home stretched themselves too thin financially. And 44% of Millennials said they discovered damage to the house or realized too late that the space did not work for their family.

Hey millennials, you’re going to need to start saving more for retirement

Millennials already stretched finances could face a new stress: slower growth of the U.S. economy.Compared with their parents, todays younger workers may need to save more of their income for retirement, according to a new NerdWallet report.

A number of analysts predict that the continuing pattern of slower growth that has taken hold since the Great Recession could cause stock market returns to fall from 7%, the annual average since about 1950, to a possible 5% in the decades to come. And that could hurt investors saving for retirement.

The new goal for retirement

The difference of two percentage points in broad stock market returns has big implications for younger adults who are just starting to save for retirement and also for those who’ve been investing for about a decade. NerdWallets analysis shows that millennials, who could earn a 5% return over the bulk of their investing lifetimes, may be required to save 22% of their annual income to make up the gap. Many retirement experts currently recommend saving 15% of annual income.

The era of supernormal returns is over, says Martin Small, the head of U.S. iShares for BlackRock, the world’s largest asset manager. Over the longer term, younger investors should expect yields and equity market returns to be low.

NerdWallets analysis

To help a millennial investor prepare for the future, NerdWallet analyzed the saving needs of a 25-year-old earning $40,000, the median salary for ages 25-29, according to the U.S. Census Bureaus 2015 Current Population Survey.

Based on the 7% average in stock market returns each year since 1950, a 25-year-old earning $40,000 can meet a common retirement goal of replacing 80% of his or her income by age 67 by saving 13% of annual income.

But if average annual stock market returns fall to 5%, NerdWallets analysis shows a 25-year-old will have to set aside 22% of annual income to save the same amount. Thats an increase of $3,400 this year equivalent to over three months of rent, based on the median monthly rent of $937 for 25- to 29-year-old households.

Image: Nerdwallet

How millennials can start preparing now

Start saving: In addition to saving more income, lower investment returns mean millennials may need to start contributing earlier to a retirement savings account than their parents did, or plan for longer careers. Use a retirement calculator to assess progress toward retirement goals and identify potential gaps.

Take advantage of tax benefits and employer matches: Estimates show a quarter of employees arent contributing enough to get the full 401(k) match. That match is free money that gets you closer to your savings goals.Those who dont have a 401(k) can get a tax deduction by making contributions to a traditional IRA.

Dont stash your retirement money in a savings account: Focus first on earning your employers 401(k) match and setting aside at least $500 in case you need quick cash. Then, consider opening a Roth IRA account and start funneling savings into that. By investing in low-cost vehicles like exchange-traded funds and index mutual funds tied to the overall stock market, like the S&P 500 Index, your money will go to work for you over the decades rather than collecting the lowinterest rates of most savings accounts.

Jonathan Todd is a data analyst at NerdWallet, a personal finance website: Email: jonathan.todd@nerdwallet.com. Twitter: @yontodd.

Read more: http://mashable.com/2016/10/03/millennials-need-to-save-more/