I’m about to retire and want to raid my 401(k) to buy a home: ‘Am I out of my mind?’

Here’s his question:

“I would like to purchase a condo in Georgia to live mortgage-free,” he writes on Reddit. “I am looking at a $450K purchase price.” He wants to finance the purchase with his $350,000 in savings and $100,000 from his 401(k). (He also wants to withdraw another $20,000 from his 401(k) for an emergency fund.) This, he says, will leave him with $380,000 in investments — enough to generate around $15,000 a year if he withdraws 4% annually.

He expects to live on his Social Security income and use the extra money for vacations, major purchases and so on.

“Does this make sense?” he asks. “Am I out of my mind?”

This post caught my eye because the issue is so common among those approaching retirement. If you have to choose, which is better: investing your money and renting, or just buying a home outright?

You can see the appeal of owning your own home. Apart from anything else, you avoid the risks of rising rents.

But it’s not a straightforward question. As usual, we have to run the numbers. 

In this case, the individual says that if he buys the condo he will still have to pay about $1,000 a month in fees, taxes and so on. But if he doesn’t buy a condo, it would cost him about $2,500 a month to rent an equivalent one instead.

I put the case to a couple of experienced certified financial planners. Both raised a bunch of big yellow flags about the idea of buying the home.

Sandra Gilpatrick, a CFP and wealth consultant in Boston, says that in this case the questioner would be spending $450,000 to save $1,500 a month net, “about a 4% yield.” But, she adds, “If you kept those assets invested in an income with moderate growth allocation (60% fixed income/40% equity), historically, a 7% average annual return would be a reasonable expectation. That makes a case to stay invested.”

She also warns that the full costs of buying the condo may work out higher than the questioner estimates. People often underestimate homeownership costs, she says. Often owners get hit with housing-association fee hikes, property-tax hikes and special assessments. There are extra costs with buying and selling real estate, which make it expensive to own somewhere for only a few years, she says.

This isn’t all, she adds: Withdrawing that money from his 401(k) could bump him into a higher tax bracket. It might also make him subject to a special Medicare surcharge — the income-related monthly adjustment amount, or IRMAA — levied on those above certain income thresholds.

Jamie Bosse, a CFP, wealth manager and principal at Aspyre Wealth Partners in Overland Park, Kan., agrees. “Don’t forget about taxes,” she says. If you take $120,000 out of a 401(k), and those are pretax dollars, “you don’t get to spend $120K,” she says. If you’re paying, for example, a 22% federal tax rate and a 5% state tax rate, she says, you might “withdraw” $120,000 but only end up with $87,600.

Both CFPs added, naturally, that they needed to know much more about the individual’s circumstances to offer any kind of detailed analysis.

There are more issues to be raised as well. Financial advisers usually recommend renting when you move to a new neighborhood, at least for a year, to make sure you like it before committing all that money to a purchase.

In this instance, the home would use up more than half the individual’s net worth. That’s a big loss of liquidity.

It’s also worth looking at where markets and asset prices are right now. While real-estate markets are very local, overall U.S. home prices are very high. Prices, according to the closely watched Case-Shiller national index, have risen about 50% since just before the pandemic. That’s the case even though mortgage rates have now skyrocketed — something that must surely put the squeeze on home prices sooner or later.

The Federal Reserve Bank of Atlanta says housing affordability is now as low as it was in 2007, just before the worst real-estate crash since the Great Depression. That’s true nationwide, and around Atlanta, the Atlanta Fed says. 

So that $450,000 condo might end up being worth less before this is done. No one knows.

Meanwhile, that money can currently earn a pretty decent low-risk return if it’s invested. Ten-year U.S. Treasurys
BX: TMUBMUSD10Y
are paying 4.3%. Short-term municipal bonds (see, for example, the iShares Short-Term National Muni Bond
SUB
) are yielding 3% tax-free with minimal risk. Longer-term munis (see the iShares National Muni Bond ETF
MUB
) are yielding 3.4%, also tax-free. The Schwab U.S. REIT ETF
SCHH
is yielding 4%.

Everyone’s circumstances are different, and each involves lots of other factors. But in this case, it’s pretty hard to see a good reason for buying, at least initially. If I were in this situation, unless I had very good reasons to buy right now, I’d be looking to rent first.