Life’s Big Buys: Travel Splurges and When to Cut Retirement Savings for a Home Down Payment

9:33Elizabeth Ayoola:Yeah. I'd be like, well, I don't really need these pajamas anymore. I don't really need this T-shirt. and then I'll just leave the things at the airport so that my baggage is not overweight. Very ridiculous.

9:42Sean Pyles:That is kind of wild, Elizabeth. I can't imagine just partying with myself. For me, I will find a way to slam my suitcase shut. I don't care how full it is. But yeah, maybe I'm just a hoarder. I can't get rid of my stuff like that.

9:56Elizabeth Ayoola:No, and maybe I'm just ridiculous. That is not a real money saving.

9:58Sean Pyles:You are a little ridiculous. All right.

10:02Elizabeth Ayoola:So when I travel, Sean, I spend the most on food and accommodation. That's usually where most of my money goes. And then childcare because, you know, I'm a single mama and someone's got to watch IO when I don't bring him. So what were the most expensive line items in your travel budget?

10:18Sean Pyles:Well, perhaps not surprisingly, the flights were a little expensive getting to and from Japan and everywhere else we went. And then hotels, too. They were decently affordable in Tokyo. We stayed at this hotel that was really bizarre. I wanted to get us a room that had laundry in it. And so I found this place that seemed kind of nice, had laundry, was fairly centrally located. we get to the hotel it turns out that this room that i booked which is a vip suite is in the basement it is really long it's about as long as our house is here and every surface is covered in mirrors and there are chandeliers about every five feet it is just like the most glittering shining room you've ever imagined there's a karaoke setup in it it was kind of crazy but somehow that was the most affordable room that we booked for the entire trip but also the most gaudy too.

11:10Sean Pyles:So I was happy to get a good deal on this totally ridiculous suite that we stayed in for a little while.

11:17Elizabeth Ayoola:Yeah, mirrors everywhere, sign me up and don't call me vain, but I like to look at myself. Was there anything in particular in terms of cost that did surprise you in your travels?

11:27Sean Pyles:A lot of it was just how affordable food was in particular. I mean, in Japan, I had the best version of Japanese food that I've ever had in my life, of course, and also the most affordable. Like in Portland here, my favorite ramen place, a bowl of ramen is going to run me close to$20. And I had a better version of ramen in Tokyo. And I think it cost me maybe the equivalent of$10. So that was surprising. Just how accessible the convenience stores are. People talk about these a lot with Japan trips. Like you go into a 7-Eleven or a Lawson's and you get like a little Onigiri or an egg sandwich or a drink.

12:05Sean Pyles:And it amounts to three bucks. And that's your lunch for the day. and then you're just back out exploring again. So I found it to be much less expensive than visiting a city like New York or Chicago.

12:15Elizabeth Ayoola:Well, it sounds like your money was well spent, but is there anything that you would do differently budget-wise now that you're back home, now that you're looking at your bank account? You know, is there anything you do different?

12:26Sean Pyles:I'm going to say no, because guess what? I still have money in my savings account that I put aside for this trip. So I did pretty well.

12:34Elizabeth Ayoola:Wait, you got some leftovers?

12:36Sean Pyles:Yes. I have over$2 ,000 left in my savings account.

12:39Elizabeth Ayoola:Oh, that's a win. A win is a win. Yeah. That is a win.

12:42Sean Pyles:So I think in total between my wedding and my honeymoon, I spent around$26 ,000. So not nothing, especially because a lot of those expenses came over the past month. But again, I've been saving for so long and I still have money that I was planning to set aside for it. So guess what? I'm buying myself a new bed frame.

13:01Elizabeth Ayoola:Oh, look at you.

13:02Sean Pyles:I'm fully in nesting mode now that I'm back home.

13:05Elizabeth Ayoola:Really, really, really love that for you, Sean. Now, my last question for you is, now I know you were saying that you're going to have to replenish your emergency savings over time, which makes sense. What are you planning to cut back on so that you can do that?

13:20Sean Pyles:It's going to be my closed budget because I already bought so many beautiful garments in Japan and in Korea that I don't need anything else. And in fact, I need to start donating things because I'm pretty much out of storage. So I don't need to buy any more clothes. And so I won't. And I will use the money that I would have spent on whatever I wanted to buy. Throw that right into my emergency savings or other life goal savings.

13:43Elizabeth Ayoola:That's right. You just got to reshuffle the buckets.

13:45Sean Pyles:But hey, Elizabeth, I know you've been asking me questions, but I haven't heard about your life over the last month. So I want to hear hotspot questions for you. What was your rose, thorn and bud about your finances over the last three weeks? Rapid fire. Wow.

14:01Elizabeth Ayoola:Okay. Let me see. A rose is my birthday is December the 18th. And since I was 35, I do a countdown to my birthday. So I'll do 35 to 35. I'm turning 37 this year. So I started over the past three weeks, my 37 to 37. I have been surprisingly, or maybe unsurprisingly, spending a lot of those things because I find one joyful thing to do a day on food. So I've been eating a lot. And for me, that is a rose.

14:28Sean Pyles:Wait, so just so I'm totally clear, you have, it's almost like an advent calendar of 37 days leading up to your 37th birthday. Okay. I love that.

14:35Elizabeth Ayoola:Exactly. And I have to choose one thing a day that brings me joy. And I'm just learning how much I like to eat because most of these things have been food related.

14:43Sean Pyles:Okay. Hold on. I love that. But quick aside, because my brain is looking ahead to the future when you're a hundred and you're going to be spending a third of a year celebrating your birthday.

14:52Elizabeth Ayoola:Do you know what? Do you know what? I'm not going to lie to you. Let me tell you something. So the first year I did a list, Like I wrote down 35 things I'm going to do. This year, I was like, one, two, three, 37. It was getting harder and harder. You got to get creative. So that's why I was like, you know what? So I haven't pre-planned out the things. And sometimes I just look for a joyful thing in my day, right? So it's just about being present and aware of what's bringing me joy that day. But yeah, to answer your question, yes, exactly. At 100, I'm going to have to start 100 days early. And it's going to be a long journey, you know?

15:23Sean Pyles:Yeah. Well, that's really sweet. That's a good rose. So what about your thorn in your butt?

15:27Elizabeth Ayoola:Ooh, so I would say my thorn this year is figuring out or over the past couple weeks is trying to figure out Christmas gifts alongside the sales because I wanted to capitalize on Cyber Monday and Black Friday. And I get really stressed out with buying things for other people because I want to buy something that they like. And then I have to read all these reviews.

15:47Sean Pyles:Yeah, not just junk.

15:47Elizabeth Ayoola:Exactly.

15:48Sean Pyles:And also the sales are not really sales anymore. It's like, guess what? They raised the price two weeks ago just to lower it for Cyber Monday. we see your game and we're not playing it.

15:58Elizabeth Ayoola:Or$2 off. Like, yeah, thanks, no thanks. Right. So that definitely stressed me out. And then what was the last one? We had a rose, we had a thorn.

16:05Sean Pyles:Your bud. What are you looking forward to?

16:07Elizabeth Ayoola:Ooh, of course I'm looking forward to my birthday and Christmas. Last year, I and I went riding around neighborhoods to look at lights and it was such a soppy, beautiful moment for us that I was almost crying. So it just makes me so happy. Yes, I'm looking forward to doing that again this year. And oh, I didn't tell you, Sean. I would say this probably goes in both the rose and bud category. But I haven't celebrated my birthday with people since my 21st birthday. So this year I'm doing a gathering with some of my close friends. And we're going to make gift boxes for homeless people. So that's going to be how I celebrate my birthday.

16:44Elizabeth Ayoola:Yes, I'm really looking forward to that.

16:46Sean Pyles:You're a good person. I love that.

16:47Elizabeth Ayoola:Oh, thank you.

16:49Sean Pyles:Well, thank you for giving me the rundown on your finances over the past few weeks. Because I've missed you. It's good to talk with you again.

16:55Elizabeth Ayoola:Yeah, thank you. All right. Well, now that we've discussed all that you spent and you hit me with those surprise questions, I think it's a good time to mention the sweepstakes if you haven't heard about it already.

17:07Sean Pyles:NerdWallet has an ongoing debt-free December sweepstakes happening to help people pay off debt. Every day from December 1st through the 25th, one person will get$100 ,000 from NerdWallet. You can enter for free at nerdwallet.com slash debt-free December or in the NerdWallet app.

17:22Elizabeth Ayoola:And Sean, while you were away, our sweepstakes were announced on Jimmy Kimmel Live. Did you know that?

17:28Sean Pyles:I saw that. That is so crazy. How cool.

17:30Elizabeth Ayoola:It is. I felt like, mama, I made it. We're on Jimmy Kimmel. All right. In a moment, we're going to answer a listener's question about whether it's a good idea to reroute savings for retirement to a house down payment.

17:42Sean Pyles:But before we get into that, listeners, a reminder for you to send us your money questions. Maybe you're wondering about the best way to save up for your own wedding, or you see the holidays rapidly approaching and are wondering about how to get the best prices on everything from presents to airfare to lodging.

17:57Elizabeth Ayoola:Whatever your money question is, we the nerds are here to help you. Leave us a voicemail or text us on the nerd hotline. The number is 901-730-6373. If you need it again, it's 901-730-NERD.

18:10Sean Pyles:Or email us at podcast at nerdwallet.com. Okay, let's get to this episode's money question. That's up next. Stay with us.

18:22Sean Pyles:Today's episode is sponsored by Rula.

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20:45Elizabeth Ayoola:And I'm super excited because the pool is back open and I recently rocked my blue one-piece bathing suit and it is a hit, I must say.

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21:15Elizabeth Ayoola:We're back and answering your money questions to help you make smarter financial decisions. This episode, we're using a question from a listener who sent us a text. But before that, let's introduce today's guest co-host for this segment of the show. We have our fellow nerd, Dahlia Ramirez. Hey, Dahlia. Hi, Elizabeth. It's great to be here. All right, Dahlia. Since you are my guest co-host today, I'm going to let you do the honors of reading the listener question. So, hi, nerds. I'm writing in with a question about balancing savings goals, specifically whether in my current budget I can reallocate some of my savings from retirement to a home down payment.

21:55Elizabeth Ayoola:Here's the information I think is pertinent. I'm 33 years old with steady work in state government with modest annual pay increases and union-negotiated inflation adjustments. I currently contribute about 22 % of my pre-tax income to retirement. I have a competing financial goal, which is that I would like to purchase a home in the near future. In our area, homes that would suit my family's needs currently cost about$380 ,000 to$425 ,000. We anticipate living in this area for 7 to 10 more years. My partner and I currently have$40 ,000 saved for combined down payment and closing costs. I set aside about$8 ,000 a year towards a down payment, and this year I started a separate savings bucket for home repairs that will grow at about$1 ,000 a year.

22:35Elizabeth Ayoola:So my question is this. Can I divert savings money from retirement to a house down payment? And is diverting future investments to my retirement accounts better than using a small sum from my retirement to use towards a down payment? Thank you for your input. To answer the listener's question, we have Kate Ashford, a core personal finance nerd who is not a stranger to the pod. Welcome back, Kate. Hi, guys. Thank you for having me again. So the listener seems to be struggling to decide financial priorities as it relates to saving. Now, Kate, if you had to provide a hierarchy for savings, what would that list look like?

23:08Elizabeth Ayoola:Sometimes people get hung up on it being either or when it can be both, as the listener seems to be doing. It doesn't have to be an either or, but you do have to prioritize. Generally speaking, financial priorities might look like having a good emergency cushion of three to six months of living expenses. You want to make sure you're making any kind of mandatory or matched retirement contributions. This reader did mention to us that they have a mandatory 10.5 % contribution to their pension plan. So that's a given. If your company offers a match, you should probably be contributing enough to get that bare minimum.

23:42Elizabeth Ayoola:Make sure you're paying off any high interest debt. That's going to be high on the list. And then after that, saving for a home down payment can fit right in, along with maybe making additional retirement contributions and then longer term goals like college savings. So you just have to put things in an order for yourself. Kate, does it ever make sense to hit the brakes on retirement savings to fund a different financial goal? At NerdWallet, we suggest getting at least a 401k match so you're not leaving free money on the table. But for example, if you have compounding high interest debt, it can make sense to redirect some funds.

24:11Elizabeth Ayoola:Dahlia, it's definitely possible to thoughtfully pause your retirement savings to pursue other goals. But there are caveats, right? You mentioned a 401k match. So if you're eligible for one of those, you should consider saving at least enough to get that match because that's free money. And you also mentioned high interest debt. It's probably worth your while to get that off your plate. Or at least set up a solid payoff plan before you really get aggressive about retirement savings. But after that, you can pivot some cash toward other important short-term goals. Generally, I wouldn't pivot all cash, but that will kind of depend on how you're doing on retirement savings.

24:45Elizabeth Ayoola:Now, if the listener does reduce their retirement savings, how can they determine how much to reduce it by? A benchmark for retirement savings is at least putting aside 15 % of your pre-tax salary every year, but that amount could vary depending on how much you have saved. Now, the listener said they're putting around 22 % towards retirement savings, which is pretty high above that benchmark. How can you decide whether it's a smart financial move to reduce that percentage? This listener is well above average. As you mentioned, they're putting 22 % away for retirement each year. There's a number out there.

25:19Elizabeth Ayoola:I went and looked it up. Of people who have a 401k retirement fund, the average employee is saving 7.7 % of their income. So that's from Vanguard for 2024. So not as much as 22. Generally, the recommended savings level is 15%. So this reader is saving more than that. So they may be ahead of the game, but they're going to have to do some math. I recommend using a retirement calculator, NerdWallet has one, to get a sense of what you'll need and whether you're on track to get there with your current contributions. They might be ahead of where they need to be, in which case they can divert a chunk of their savings toward a home down payment.

25:54Elizabeth Ayoola:Easy. Then see what happens to your numbers if you divert, let's say, 7 % of your income toward a house down payment for a year or two and save only 15 % of your income. Set an end date. This is a short-term goal. So at a certain point, the idea would be to go back to your original savings level as needed. And if you're way behind on retirement, diverting retirement funds to a house down payment might not be the wisest course of action. But this reader doesn't seem like they're in that position. I know when I first started trying to calculate my retirement savings or how much I should have, I did use a calculator, but sometimes it still seemed overwhelming.

26:29Elizabeth Ayoola:So for anybody out there who may feel like that, another way to look at it is that we recommend having at least by 30 one times your annual salary saved. That's a very good marker. Our reader is 33, so they can check in on this kind of immediately. And in case you're wondering, the goal overall is 10 times your salary by age 67. Those are the rules of thumb from Fidelity. So, Kate, what are the pros and cons of halting retirement savings? We know losing out on compound interest is the biggest downside. And the more you invest and the longer you invest it, the greater the benefits for your savings pot long term.

27:03Elizabeth Ayoola:Are there more pros and cons we should know about? Well, Dahlia, for sure, you're going to miss out on that growth over the years between now and when you retire. People talk a lot about the power of compounding and can kind of make your eyes glaze over, but they're not exaggerating. The earlier you start, the less money you have to save each year. But the reader wouldn't be stopping all savings. They're just talking about decreasing the amount for a period of time. And that money isn't just disappearing into a black hole. It's going to be put into a house, which is also a big asset that can often be leveraged in your retirement years.

27:32Elizabeth Ayoola:So it can kind of be viewed as just pivoting with some of your retirement money. I often have apprehension about minimizing my retirement savings, but I like how you're looking at it as it's going towards another financial goal that supports your financial future. Exactly. All right, let's move on to the next part of the listener's question. whether they should divert funds from their Roth or 403B. Now, they told us that they currently contribute about 7 % of their after-tax income to max out their Roth IRA, and they contribute 4.5 % of their pre-tax income to a 403B with an annual 0.5 % increase up to 12.5%.

28:09Elizabeth Ayoola:Stay with us, guys. I know that was a lot of numbers. Now, both are retirement accounts, but they offer different benefits. Kate, can you talk through the pros and cons of diverting funds from each? So these accounts are different in a few ways. Roth IRAs are funded by putting in after-tax contributions. So the money in there grows tax-free and all qualified withdrawals in retirement are tax-free. So that is a nice account to have. A 403B works like a 401k, but it's for employees at public schools, nonprofits, some faith-based organizations. and it works in that contributions are pre-tax and they reduce your taxable income, but you will pay tax on future withdrawals.

28:48Elizabeth Ayoola:You could make an argument for either choice, but one thing to keep in mind is that Roth IRAs are more flexible. You can take contributions out ahead of age 59 and a half without taxes or penalties. The 403b, on the other hand, your money is kind of locked in there until age 59 and a half unless you meet some pretty specific requirements. So it's probably worth considering stopping or lowering the contribution to the 403b in the short term and keeping some or all of the Roth contributions because the money you're putting into the Roth is more accessible if you need it. So that 403b money is locked in, but the listener wants to know whether they should consider moving a small amount from their Roth towards their home down payment fund.

29:28Elizabeth Ayoola:We know a benefit of Roths is you can take contributions, not earnings, without paying penalties or taxes. Can you touch on this? So because a Roth IRA is funded with after-tax money, all your contributions are available for you to take back out without penalty or taxes at any time. That's contributions, not earnings on those contributions. So this does require some pretty good record keeping. And to be clear, I'm not advocating using your Roth as a piggy bank, but it does have some flexibility. If the listener is a first-time homebuyer, they may be able to benefit from a Roth withdrawal too, right?

30:00Elizabeth Ayoola:Yes. So in addition to the flexibility to take out contributions at any time, If the listener is a first-time homebuyer, sounds like they are, they might be able to benefit from a Roth withdrawal of earnings. You can take up to$10 ,000 from a Roth for a first-time home purchase without paying any taxes or penalties. But honestly, I probably wouldn't move any money from the Roth until it's nearing time to put money down. I would concentrate on building up that down payment fund with the knowledge that if you need it, you can pull out up to$10 ,000 from that Roth. Right. They're not moving immediately.

30:31Elizabeth Ayoola:So there's a little time to get that money built up. let that grow a little. Yes. Is there anything else the listener should consider, Kate? I do want to mention that my answer might be different if this reader was saving less for retirement. If someone had texted us and said, hey, I'm saving 10 % toward retirement and I want to cut that in half to save for a house, I would really want them to look at the math and make sure their retirement still looked okay if they did that. And for anyone really considering a big money move like this, it's probably a good time to talk to a financial professional to see what they recommend.

30:59Elizabeth Ayoola:And I do want to say out loud, I'm just super impressed that at 33, our reader is saving 22 % of their pay toward retirement and has a pension and has thought ahead to pre-fund home repairs. We should all be so disciplined, right? We really should. All right. Thank you so much for coming on, Kate, to answer this question and also lending your expertise. Thank you for having me. And that's all we have for this episode. Remember, listener, that we're here to answer your money questions. So turn to the nerds and call or text us your questions at 901-730-6373. That's 901-730-N-E-R-D. You can also email us at podcast at nerdwallet.com.

31:39Elizabeth Ayoola:And of course, we want you to join us next time to hear about how to invest your retirement fund. In the meanwhile, follow Smart Money on your favorite podcast app. That's Spotify, Apple Podcasts, and iHeartRadio to automatically download new episodes. And here's our brief disclaimer. We are not your financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances. This episode is produced by Tess Vigeland. Hilary Georgie helped with editing. Nick Carismi mixed our audio. And a big thank you to NerdWallet's editors for their help.

32:11Elizabeth Ayoola:And with that said, until next time, turn to the nerds.

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