Financial planning and investment strategies are all about managing different life goals and ensuring that they are all achieved within the required timelines. Two major goals that most people have are home ownership and retirement. You too may be trying to balance these two goals. So, what should you do — save for retirement or save for a house?
While it is undoubtedly important to realise your dream of home ownership, retirement savings must be prioritised if you can only focus on one of these goals. That said, let us delve further into this topic and see if it is possible to balance the two.
Should you consider buying a house or saving for retirement?
Financial multitasking is not an easy task. Even though fulfilling both life goals, buying a house and saving for retirement, can be worked towards and achieved simultaneously, it is incredibly difficult. Most people must pick one and work towards that goal with all their might. If so far in your life you have not started preparing for your life after retirement, saving to ensure your financial stability always takes precedence.
Let us take a closer look at how much you would need to buy a house and save for retirement.
How much do you need to save for a house?
The amount you need to save for a house primarily depends on the house price, location and the home loan interest rates. Generally, a 10-20% down payment is required on the price of the house. For instance, if you want to buy a property for Rs. 50 lakhs, you need to pay around Rs. 10 lakhs as down payment. You also need to factor in additional costs like the stamp duty value, home furnishings and improvement and other moving expenses.
Also read: How to start a SIP to save tax on your income
How much do you need to save for retirement?
To find the amount you need to save for a house, factor in your expected lifestyle, anticipated retirement age and your current age. A common rule is the 30x rule, which states that you must save 30 times your annual expenses to retire comfortably. So, if your annual expenses amount to Rs. 10 lakhs, you need Rs. 3 crores to retire. You also need to factor in inflation in your calculations.
How to decide whether to save for a house or save for retirement?
To decide which of the two goals you need to prioritise, you need to consider a wide range of factors like the following:
1. Financial stability and income
Evaluate your income stability. A steady and high income may allow you to focus on both goals simultaneously. On the other hand, if you are still building your career, you may need to focus on just one goal.
2. Current age and retirement goals
If you are younger and retirement is several decades away, you could first save for a house. However, the earlier you start to save for retirement, the more you benefit from compound interest.
3. Housing market
Analyse the housing market in the area in which you want to buy a house property. If it is currently a buyer’s market, you may want to prioritise purchasing a home before prices rise.
4. Debt levels
High debt levels could make it difficult for you to balance both these goals easily. High-interest debts, in particular, should be managed before you make any substantial investments to buy a house or build a retirement corpus.
5. Interest rates
Look into home loan interest rates. Lower rates may make buying a house more appealing at the moment. Higher rates will make borrowing costlier, making retirement savings a more achievable goal instead.
Also read: What is the best age to start SIP
How to balance buying a house and saving for retirement?
While it is incredibly tough, it is possible to balance both financial goals. One interesting perspective is thinking about home ownership as an asset and investment, which will provide you with financial security post-retirement as well. Consider the following aspects and ideas which will help you balance both—saving for retirement and buying a house:
1. Determine how much to save
Having a clear picture of how much you have to save is important. Planning is the first step of the process. One of the primary challenges that people face when planning to buy homes is affording the down payment. Since most homebuyers are relying on a loan to purchase a house, interest rates also play a vital role. These expenses help determine what amount you have to save each month to invest for your retirement and own a home.
2. Diversify your assets
While owning a home is an asset, it should not be your sole asset. It is important to diversify your investment portfolio to ensure financial security in your sunset years. There are three primary facets to saving for your retirement. These include your personal savings, social security, and retirement plans sponsored by your employer. Whatever you can save each month is a direct contribution towards your own financial security.
3. Establish timelines
While saving and investment is a long-term process, it should not be viewed like that in perpetuity. What helps is setting a clear timeline interspersed with smaller goals and milestones. This would not only help you inculcate discipline in your investing but would also encourage realistic goal setting and prioritising. To understand this better, let us return to one of our previous points. Defining a certain timeline for your investment goals will help you plan your savings better. Once you know how to reach your goal, you will have a clearer idea of how much you need to save every month.
The specific timeline that you set and adopt will vary depending on a plethora of factors, including where you are in your career and when you want to retire.
4. Simplify your savings
Utilising the advancements in the banking and finance sector, automating your savings is a great way to not just simplify your personal finances but also ensure that you save some money every month. For instance, the PPF schemes offered by employers must be utilised to the fullest to secure your future. With schemes like these, you not only earn more interest than regular savings accounts but also avail of tax benefits. With numerous progressive and multinational companies, your contribution towards the retirement account is automatically deducted from your paycheck.
5. House hacking
While it may seem like a contrarian approach, house hacking is a great way to augment your retirement income. House hacking can help boost your retirement savings if you possess extra income and are open to frequently relocating.
How can mutual funds help in saving for both—a new house and retirement?
Mutual funds can help you save for both buying a house and planning for retirement by offering diversified investment options that can grow your money over time. For example, if your primary goal is to buy a house, you can choose mutual funds with a medium-term horizon, such as debt or balanced funds, which offer stability and moderate returns. On the other hand, if your primary objective is to save money for your retirement, equity mutual funds or retirement-specific mutual funds can provide long-term growth due to their higher potential returns. It may be a suggestion worth exploring that the best approach would be to invest in both types of mutual funds to build a balanced and diversified portfolio, which will effectively take care of your long-term and short-term needs.
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More ways to boost savings for achieving the financial goal
One of the most popular ways to boost your revenue is to set up streams of passive income, which can mean getting interest income, renting your house, etc. Perhaps another way could be to reevaluate your own lifestyle and make changes like moving to a smaller apartment or taking up a second part-time job, among others. Learning what provisions are in the tax and penal codes for refunds and exemptions will also be an immensely helpful exercise.
Save for a house or save for retirement: Balancing both goals
To balance both goals instead of choosing to save for retirement or save for a house, you need a strategic approach to financial planning. You can begin by assessing your financial situation and set clear goals based on your age, income, lifestyle and expectations. Then, allocate some of your regular savings to building a retirement account, so you can benefit from compounding. Simultaneously, set aside some part of your savings to accumulate the funds needed for a down payment on your house. You can adjust the savings ratio based on the amount required to buy a house and the retirement corpus you need.
How mutual funds can save for a house and retirement?
If you are looking for suitable investments that can help you balance the goals of home ownership and retirement, mutual funds may be a suitable choice. To save up for the down payment of your dream house, you could choose conservative or moderately risky mutual funds. This is because the investment horizon to save for a house is shorter. For the long-term goal of retirement, you could include top-performing equity mutual funds in your portfolio.
Should you consider seeking professional advice for achieving both financial goals?
Financial advisors and planners are professionals in the financial market. They can create a customised plan and budget for you from scratch. In addition, these professionals also help you diversify your portfolio and establish a set timeline.
If you are a market investor, new or old, big or small, it is still important to connect with a financial advisor to stay on top of your game. A professional will help improve your financial wellness and aid you in attaining your long-term goals.
Presently, there are also a large number of digital financial applications in the market that can help you budget for your investments and financial goals and may offer some general guidance on saving for priorities like owning a home. Besides this, you can easily consult with any bank to understand which investments are worth it, as they offer free consultations as well.
Conclusion
Ultimately, the decision to choose between the two goals is yours to make. However, retirement is a milestone that is universal to all working individuals. So, putting off this goal can be a costly mistake. To balance both goals and save for retirement and save for a house, you can check out the 1,000+ mutual fund schemes available on the Bajaj Finserv Mutual Funds Platform.
Depending on the overall investment horizon for each goal, you can compare mutual funds and choose schemes that align with the timeline you have in mind. You can also start a SIP investment to get a headstart on your retirement planning while you are young and capable of bearing market risks.
