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Author: 2old4bs Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76237  
Subject: Re: Hello, and what do I do now? Date: 7/10/2005 1:45 PM
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Also, I'd like to buy a house someday so I guess I need to start saving for a down payment. How should I prioritize that against my goal of increasing my retirement savings to 25%?

Congratulations on the foresight and discipline you've shown at this early age!

I agree with Ziggy 29 when he says:

If you could ramp up to 25% of your income into savings and investments of various sorts, I'd probably put 6% of pay into the 401(k) (since you said your employer matches 6%) plus a Roth IRA contribution. Everything above 6% of pay plus some for the Roth, I'd put in savings for a home purchase. – Ziggy 29

Even if you never plan to marry or have a family, owning your own home or condo is one way to diversify your investments, as well as mitigate the risk of finding yourself homeless one day.

But I don't quite agree with Hal when he says this:

A first time home buyer can take out everything he put into the Roth to put towards a house, but not the earnings, if I remember correctly. – Hal

Although one can withdraw contributions made to a Roth without consequence, IMHO it is not a good idea to deplete one's deferred retirement savings for any non-emergency reason. Keep in mind that one can't just 'repay' the money back in, it can only be 'paid back' via the contribution limits each year. In the meantime, there's a chance that you might be drawing it down at a point where the market moves up 30-40% in the following 2 years, and you will have lost the equivalent of many more years (possibly even 10-14) of returns simply via 'bad' timing. This is the major drawback, and I have seen it first-hand when I borrowed against my 401(k).

I'd been looking at using I-bonds rather than a savings account. The savings account works well for me though because I auto-deposit into it and "trick" myself into saving. ;)

Use Ziggy's suggestion of moving the 4% (over the match) 401k contribution to the savings account. In addition, ramp up the auto-deposits to what is comfortable for you. Maintain at least 6-12 mos of living expenses as your e-fund there. Each May and November, when the I-bond rates are announced effective, move the dollars you've contributed to the savings account that are in excess of the amount needed for your e-fund to I-bonds. Then when you're ready to purchase a home/condo, you can cash in the I-bonds for the down-payment.

2old
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