As personal finance rules go, this one is ironclad. You’ve heard the axiom most of your life: always invest all you can into your 401(k). It’s the smartest place to put your savings. And by and large, that was true.
Until now. Until the housing boom went bust. Post-2008, a lot has changed, and, arguably, so has the rule that you are supposed to pour all your liquidity into your retirement fund.
That’s because it’s still difficult to take advantage of mortgage rates at historic lows and houses at rock bottom prices. Credit just isn’t flowing. Anyone who has applied for a loan or tried to refinance lately knows that banks are being very careful.
A new report by Ellie Mae shows that even borrowers with traditionally excellent credit profiles and quality loan-to-value ratios aren’t getting the thumbs up.
What do you need to help improve your chances for a refinance or mortgage?
With credit dry, you need liquidity.
Rich deSalvo, author of "The Power of Pain" and a former managing director at Morgan Stanley (MS), who at one time wholesaled a bundled 401(k) strategy, agrees that extra cash can help you get a loan.
And that means you should not max out your 401(k) but think about putting in as much as your employer will match and then taking the rest and having it available as a cash reserve available for a down payment or escrow account when you apply for a loan.
If you don’t have a 401(k), de Salvo suggests you put away 6% for retirement and sock away a few percent for your “reserve” fund, its use solely for non-depreciable assets.
Banks just don’t want to lend anymore for 20% down, and even if you have a credit score that would make your teenager’s SAT scores blush, it’s just plain hard to get a refinance or mortgage without some extra cash at the ready.
Don’t look at this as cheating on your retirement. You’re not taking this money and running to the lottery or the casino or splurging on a vacation or new outfit. Rather, you’re bettering your chances of taking advantage of incredibly low rates and/or terrific sales prices; you are investing in your future.
Sometimes the rules of personal finance have to change with the times. And in the post-housing-boom- bust, even the concrete rules are starting to show cracks. It's important that devotion to them doesn’t create fault lines in your future. A little flexibility is okay every once in a while.