401(k) savings or buying a home? What to prioritize?

Home ownership is the American dream, and often unrealistic. More than 80% of renters lack sufficient incomes or credit scores to secure a mortgage. Even if you can swing one, it may be the wrong move. To weigh whether saving in a 401(k) or owning a home should be your top priority, ponder these four questions.

Can you maintain six months of emergency savings? 

Amassing a down payment isn’t enough. Without enough savings, you aren’t ready for life’s curveballs. Six in 10 Americans face major unexpected expenses annually. Yet only four in 10 have emergency savings. What if your roof leaks? Or your car breaks down? You need those extra savings just in case. 

Emergency funds are vital if you own a home or rent. Always prioritize emergency funds before maxing out your 401(k). If you tap your 401(k) to cover an emergency before age 59½, the IRS likely taxes the withdrawal — possibly slapping on a 10% penalty to boot. 

Is buying really better than renting for you?  

Buying isn’t always wise. Many cite tax benefits, but Congress just downsized those, limiting property tax deductibility. Mortgage interest, too. By doubling the “standard deduction,” Congress shrunk home deduction attractiveness. These reduced benefits raise the bar on whether a home is a good investment. But 401(k) saving remains just as tax friendly.

Dave Barry once said: “All mortgages basically work the same way: You sign a bunch of papers, then you make large monthly payments until the Second Coming.” American homeowners’ monthly housing costs are higher than renters’. Floridians pay 33% more, on a median basis. In New Jersey, owning is nearly double the cost of renting. Find your state here:

With a mortgage, you hope to eventually sell your home for more, repay the bank and come out ahead. This presumes your future sale price exceeds what you borrowed plus all interest. Home values have risen over time. But since 1950, we’ve had four major housing market declines. They lasted between three and 14 years each. You can’t always delay moving until profits are ripe. 

And don’t forget the adage "location, location, location," and the risks it implies.  Bay Area, Portland, Ore., and Denver home prices soared this last decade. But they didn’t in Minneapolis or Detroit. And folks who gambled on Las Vegas lost. Local markets vary in supply and demand. Can you predict what builders may do? Or what demand there will be in 10 to 20 years? Whether employers will come ... or go? 

Investing in your 401(k) with a globally diversified stock portfolio likely renders returns of 5% to 10% annually over the decades. Not spectacular, but your fortunes won’t be tied to one Zip code. As I’ve shown in past columns, stocks are short-term risky but among the very least risky investments in the very long term.

Are you on track for your retirement goals?

More than half of American families have no retirement savings. Owning a home won’t guarantee your retirement. Medical expenses loom large late in life. And, as I wrote last week, life expectancies are rising. Think about the lifestyle you’ll need, determine the cost and assess whether you’re on track. More on this next week.  

Are you considering a job change or worried about layoffs?

If so, getting a new mortgage may be really stupid. Even switching jobs is risky — what if it goes badly? Without income, how can you pay your mortgage? Better to buy when you’re confident of your job for years ahead, not right when you switch. 

Home ownership is wonderful. But don’t underestimate renting plus 401(k) savings. When you mortgage a home purchase, you’re investing borrowed money. You can lose it all, interest and down payment. But when cash-crunched, you can skip retirement contributions temporarily. Good luck with that on your mortgage payment. 

In the end, you’ve got to weigh a home’s upside and risk versus a more secure retirement.

Your call. 

Ken Fisher is the founder and executive chairman of Fisher Investments, author of 11 books, four of which were "New York Times" bestsellers, and is No. 200 on the Forbes 400 list of richest Americans. Follow him on Twitter @KennethLFisher