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Save for retirement or for a first home?
A recent college grad wants to know the best way to divvy up his savings.
November 22, 2005: 11:19 AM EST
By Walter Updegrave, CNN/Money contributing columnist

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NEW YORK (CNN/Money) - I recently graduated from college and am working at my first full-time job. I'm trying to save for retirement and a down payment for a house.

How do I decide how to divvy up my savings? I know I should start saving early for retirement, but isn't it also a good idea to stop renting as soon as possible?

-- Lauren Mounsey, Norwalk, Connecticut

I totally agree that you should start saving early for retirement. The sooner you start doing that, the more time your money has to compound and the larger the nest egg you'll have when you reach retirement time.

But it's not necessarily a good idea to stop renting as soon as possible, even though it has become a prevailing notion in light of the fact that U.S. home prices have increased about 50 percent over the past five years.

If you're confident you'll be staying where you are for a good while, then buying a house may make sense. I wouldn't do it just because I thought I'd make a killing in the real estate market or because I was afraid that if I didn't get on the real estate bandwagon now I might not be able to get on in the future.

On the other hand, there are many reasons why renting may be the better choice, particularly at your age. Perhaps you'll want to try living in a different part of the country. Or maybe you'll want to be able to move quickly and often to pursue better career opportunities.

That's not to say that once you buy a house you can never move, but transaction costs in buying and selling a house are relatively high, which means you're generally better off not owning unless you plan to stay at least five or so years.

Dividing up your savings

So getting back to your question, I think that you should definitely start saving for retirement ASAP. Saving for retirement isn't something to do with leftover money. It should be considered a core living expense. It is paying for housing and food that you'll need after you leave the work force.

Assuming your company has a 401(k) plan, sign up for it as soon as you're eligible and contribute at least enough to get the full employer match. If you can possibly max out, do so.

If you decide you really do want to be a homeowner this early on, you can then direct extra savings toward your down payment. It may take you a few years to accumulate enough cash to buy.

And assuming your plan allows for loans -- as nearly 90 percent do -- you can always borrow from your 401(k) to cover part of your home purchase. This, however, is an option to consider only if you really need to.

If you decide that home owning can wait, consider throwing money into an IRA in addition to maxing out your 401(k). If you're going to get a jump on your retirement savings, you might as well make it a big one.

To find out why I think people like you should generally favor a Roth IRA over a traditional IRA, click here.

_________________________

Walter Updegrave is a senior editor at MONEY Magazine and is the author of "We're Not in Kansas Anymore: Strategies for Retiring Rich in a Totally Changed World."

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