AFM Reader: I Want to Pay Cash for a House in 12 Years!

I have been reading your blog for about 2 months and feel that you would be a good person to ask some advice.

I am currently in the Army and have 12 years remaining until retirement. I am 33, wife is 31. My wife and I would like to save $1600/month from now until then (12years) and pay cash for a house when I retire. We do not have any debt. We move about once every 3 years so purchasing a house between now and then is not something we wish to consider. I do not want to take out a mortgage and rent the home for 12 years, either. The question is where should I put the money (account-wise)? I am already putting in 15% to the TSP (like a 401k). Should I put the extra 1600 in two Roths (her and I) and use the “first time homebuyer clause” for withdrawing penalty-free? I realize I will exceed the limits, but is that a good place to start?

I appreciate your time. By the way, great blog.


In a follow up email, I found out that MH makes about $5,587 per month. He also gets a non taxable housing allowance of $1,350 per month but we’ll leave that out of this exercise.

I ran MH’s numbers and here’s what I came up with.

Monthly savings: $1,600
Allocated to Roth IRAs: $833 (earning 8% per year or .67% per month)
Allocated to taxable savings account: $767 (earning 3% per year or .25% per month)

Here’s what the numbers could look like over the next twelve years (using the 2008 federal income tax rates and brackets):

At the end of 12 years, MH would have $116,000 sitting in his taxable savings account and nearly $202,000 in his Roth IRAs. The IRS allows Roth IRA holders to withdraw their contributions tax-free, so MH and his wife could withdraw $120,000 ($10,000 per year × 12 years), giving him a total of $236,000 to put towards a house. He would also have $82,000 in his Roth IRAs.

Another option for MH would be to pay the taxes on the interest in the savings account from sources other than the savings account. If he did that, his situation might look like this:

Paying his taxes from other sources would give him an extra $17,000 to go towards his house.

MH could roll the dice a bit and invest his taxable money more aggressively by utilizing index funds. His potential return would be better but he would also increase his chances of having less money to go towards his house. In my mind, the worst case would be that he would have to buy his house with the help of a mortgage, which as he stated in his email, is NOT his goal.

Bottom Line

MH and his wife are in a good spot. He’ll retire from the Army at age 45 and be able to start a second career. He’ll have a nice retirement nest egg and a nice chunk of money to go towards his house. He should be giving financial seminars to all his Army buddies!

12 thoughts on “AFM Reader: I Want to Pay Cash for a House in 12 Years!”

  1. I would like to bring attention to the additional costs of owning a new home. Most likely this home is going to be bigger, which means you have to fill it with more stuff, perhaps pay more to keep up with the yard. Also, you may be paying higher property taxes. The cost of living in the surrounding area may be higher if it’s a more well-to-do community. If its out in the private of the country you have added gas costs of traveling into town even if the prices are better. You also have to consider inflation costs and rising energy costs. With a 12 year goal, I wouldn’t want the completion of a lifetime goal to end up being a disaster 2-3 years out from the actual purchase of the dream home, with some full planning of these elements too, he could make up for this in the actual strategy in the 12 years prior.

  2. Where exactly is the 8% ROR going to come from? Index Funds? Do you think index funds are going to return 8% annually? Even Warren Buffet doesn’t think indexes will return 6% or 7% max. The Dow, for the last 8 years, has been essentially sitting at 11,300. Not exactly 8% ROR.

  3. David,

    Neither you, me, or Warren Buffett knows what the market is going to return in the future. So, I simply used a conservative historical average. Besides, for this illustration, the market’s immediate return does not have an impact on the outcome of this situation (unless he ends up losing money in his Roth IRAs).

  4. After reading your post I have to question the wisdom of unplugging or withdrawing money from your IRA, 401k or any long term investments! While the numbers on the IRA look really good in 12 years, you fail to take into account the BIG hit MH will take in retirement dollars by taking a withdrawal to his IRA. I believe that better advice could be having MH take the money from his savings accounts and use this money to buy something that he could afford to own with a small mortgage. Now, this might not be his dream house, but why not encourage MH to continue to save and work his way to the dream house, without sacrificing his retirement!

  5. Mike,

    I understand what you’re saying but keep in mind that this is what HE WANTS. Besides, he is saving 15% of his income in a retirement plan.

    Yes, if it were my money I would take on a mortgage and leave the Roth money alone but that’s not what this reader asked.

  6. $1600 a month ($19200 a year) x 12 years = $230,400 absent any other factors. current annual income $67k. investing the $19200 at plain vanilla 5% cds every year and paying fed tax – figure cd interest taxed at 25% – leaves risk free – ballparking with pencil and calculator – $298,000 after 12 years. MH and wife, jot that down. i’m guessing, you might be pretty happy with that since it is a 100% ironclad worry free number.

  7. Houses are NOT going to be worth what they are today in 12 years. Maybe I’m pointing out the obvious, but historically houses double in price over a 10 yr period. So a $300k house now, will be about $600k in 12 years… something to consider..?!? I feel like no one brought this point up….

  8. I just wanted to add for those of you concerned about taking money from a Roth — he is retiring from the military after 20 years and that gives him some (I don’t know his rank, etc) guaranteed retirement money in addition to the 15% he is contributing to TSP.

  9. Houses double every 10 years? That seems a bit extreme. Do you have something to back that up? Not doubting you, I just don’t know of any houses is “real” markets (meaning ones not in a bubble the last few years) that have doubled at a ten year rate. My parents home in NC was built in 1975 for $35k. It’s been very well cared for and has some nice additions, but its not worth $280k today. My home in Memphis was purchased 7 years ago and has increased about 30% with little to no improvements made, just regular maintenance. I don’t see it increasing that much mroe in the next 3 years.

  10. Uh, there are a LOT of places where more or less 200K won’t even come close to purchasing a house (plus closing plus taxes plus furniture, etc.). Besides, this is 200K in 2020 dollars, so it’s worth even less.

    I hope he isn’t planning on buying in one of those places.

  11. On average, house prices have matched inflation. The current run-up in house prices is abnormal and not sustainable, as we are now seeing. As long as he matches or beats inflation over the next 12 years he should be able to afford an equivalent to about a 175k house today.

    I do like muddlehead’s idea. If you can find a long term CD with a good rate, that would be the way to go.

  12. I don’t know where you people live, but there are many places where a decent house costs under $100k, so he should be fine even if he puts his money in CD’s, and even if the price of homes double by then.

    As far as taking money from a Roth, it is an unwise idea if you had been putting that money away for retirement and then decide to use it for something else. However, if you have already planned for retirement and contribute with the intent of using it for a house, or college, or medical expenses, or whatever, it’s a good way to do it tax free.

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