How Using Your 401(k) To Buy a House Can Delay Retirement and Complicate Aging in Place

President Donald Trump has floated plans to let Americans more easily tap their 401(k)s to buy a home. But financial experts say that move could come at a high cost—not just in lost retirement growth, but in long-term financial security.

On the surface, the trade-off looks manageable: Pull from your 401(k) to fund a down payment, build equity, and gain stability. Yes, you may need to make catch-up contributions, but the logic is that locking in fixed housing costs will ease financial pressure over time.

Except, it’s no longer such an easy calculation.

Homeownership costs have surged 26% over the last five years, driven by rising insurance premiums, HOA fees, property taxes, and maintenance costs. That means today’s buyers aren’t just choosing between rent and a mortgage—they’re also taking on a far more expensive burden, one that could drain savings and delay retirement.

“Financially, the American dream should not be homeownership, but should be financial independence,” says Robert Johnson, CEO of Economic Index Associates and a professor at Heider College of Business at Creighton University.

“People fall prey to the stories of individuals realizing substantial gains by buying a home and selling it at a much higher price years down the road,” he adds. “The fact that in the United States a large percentage of an individual’s net worth is concentrated in home equity adds to the mistaken belief.”

He points to the fact that almost 29% of household wealth was tied up in home equity as of 2021, according to data from the U.S. Census Bureau. But that wealth is often illiquid, locked inside a property that doesn’t pay medical bills or cover long-term care.

And if that home was purchased by draining retirement funds during peak compounding years, the risk grows, setting up homeowners for the possibility of shouldering high living expenses with a retirement fund that never caught up.

The compounding problem: A down payment that comes out of your highest-growth years

Johnson offers a blunt take on whether or not it’s a good idea to tap 401(k) savings to buy a home: “Simply put, this is an absolutely terrible idea. People need to save more for retirement, not less.”

He’s not alone in that warning. Only 2 in 5 Americans are on track to meet their retirement spending needs, with the average saver facing a $5,000 annual shortfall in retirement, according to a December 2025 report from Vanguard. And with Social Security projected to reach insolvency as early as 2033, personal savings are more essential than ever.

But tapping into those savings to buy a home would of course add an even greater discrepancy between what Americans need and what they have in their retirement accounts. 

Jay Zigmont, certified financial planner and founder of Childfree Trust, adds that it comes at the worst time, too: “When you take money out of your 401(k) and the stock market to buy a house, you are effectively cutting your growth in half,” he says.

A basic early withdrawal calculator shows how an early withdrawal can dwindle due to penalties and lost compounding power. For example, a 35-year-old who withdrew $100,000 would receive only $66,000 after taxes and penalties, while they’d lose out on $474,000 based on a 6% rate of return annually over the next 30 years.

While it’s true that recent years in the housing market saw rates of return that far exceeded 6%, like when home prices grew close to 19% in the first quarter of 2021—those years are the exception, not the rule. The historical average for national home price appreciation is closer to 3% to 5%, while home prices are expected to grow just 2.2% in 2026.

Meanwhile, the S&P 500 has delivered an average rate of return of close to 7% since 1957, when adjusted for inflation, and is projected to rally to 12% in the next year—although global uncertainty could complicate its growth.

“No one knows for sure what home values will go up by or what the market will do over 10 years, but historical averages give you an idea of what would have happened in the past,” adds Zigmont.

And when looking back, it’s clear what years of lost optionality can do to someone’s net worth.

How tapping your 401(k) changes the retirement timeline

The key element that many forget is that the moment you withdraw from your 401(k) to buy a house, your retirement clock resets.

“There aren't any good options if one hasn't saved enough for retirement,” says Johnson. “Once one gets to retirement age and hasn’t accumulated enough retirement savings, one only has two options left—continue working or accept a lower standard of living in retirement—and neither of those options are good.”

The biggest risks start to materialize around age 40, according to Adriana Montes, founder and CEO of Florida Dreams Realty Group. That also happens to be the age of the typical first-time homebuyer today.

“This is the danger zone,” Montes says. “You’ve lost half your compounding runway, but retirement expenses are now much clearer.”

She estimates that a $25,000 withdrawal at 40 would take roughly $4,000 a year in catch-up contributions over 20 years to make up the difference, while a $100,000 withdrawal would take as much as $15,000 per year.

“Many people underestimate how hard it is to ‘catch up’ while juggling family and peak earning pressures,” she adds, underlining how borrowing from your retirement is far from free.

The aging-in-place trap: A house doesn’t fund the expensive part of getting old

The growing trend of aging in place introduces yet another complication to the retirement calculation.

“Long-term care is the largest single expense most people will have in retirement,” says Zigmont. But if you’ve pulled money forward to make homeownership work now, you may reach retirement with fewer liquid resources to handle the costs that actually determine whether you can stay put.

This is already happening en masse across the country. Today, Americans with a paid off mortgage can live off of Social Security alone in only 10 states, according to a Realtor.com analysis of Social Security benefits by state and the Elder Economic Security Standard Index—a number that is likely to shrink in the coming decades.

Health care and insurance demands often rise with age, and homes frequently need modifications to stay livable—think ramps, bathroom retrofits, or stair solutions. In-home support can become essential even for people who remain relatively healthy.

"A paid-off home feels safe—but it doesn’t pay medical bills, taxes, insurance, or caregivers," warns Montes.

"Real estate is illiquid, market-dependent, and expensive to convert to cash," she adds. "When retirement savings are compromised early, people lose flexibility at the exact stage of life when optionality matters most."