Should She Tap Retirement Money to Buy a House for Cash?

Home ownership has become something like a philandering spouse to the faithful and long-suffering American public. The betrayals have been many: predatory mortgages, devastating foreclosures, wrenching declines in value, failed modification programs. And yet our passion for it still burns brightly: According to a survey released last week by the real-estate site Trulia, 70% of U.S. consumers polled continue to view home ownership as an essential part of the American dream.

A 53-year-old woman in North Carolina who asked to remain anonymous, says it's all she thinks about. (For the purposes of this article, we'll refer to her as Jane.)

Jane's divorce was finalized in May, and now, she wants to relocate to a city with a stronger job market, where she's looking to spend up to $100,000 on a bungalow for herself and her 100-pound dog. "He is by far the best medicine any medical professional could have [prescribed], as he gets me out of the bed each morning for a 4-mile walk and gives lots of love and understanding," she says. "He is my only child."

Right now, Jane pays $300 a month for a 200-square-foot studio. "All I've ever wanted was a two-bedroom, one-bath with a vegetable garden, that will give my dog the freedom to be an animal again," says Jane, an Army brat who has lived all over the world. "I just want stability and peace, a little home to call my own that no one can take away." She surfs real estate websites such as Homepath.com, where Fannie Mae markets foreclosures.

Jane has no debt and solid assets, including $140,000 in retirement savings. She also has cash, stocks and bonds worth $30,000; and $57,000 through a Qualified Domestic Relations Order, an agreement that transfers assets in a divorce, typically pension or retirement plan benefits.

But her income prospects appear meager. A saleswoman who formerly earned up to $80,000 a year, Jane has been out of the workforce for a decade. She sent out hundreds of résumés, but could only find a position as an "on call" bellman in a hotel, "which means I work when they want me with no benefits except a 401(k)," she says. She earns $750 a month, and will receive $2,000 a month in alimony for two years.

Jane thinks her low income will disqualify her for a mortgage, so she's considering cashing out the QDRO and borrowing or withdrawing from her retirement accounts to pay cash for a house. (Any money she cashes out will be hit with a 10% penalty, plus income taxes.)

Why Losing Her Liquidity Is a Risky Move

Gabrielle Clemens, a Boston attorney and financial adviser specializing in divorce, suggests Jane find a job in a city that offers housing in her price range, relocate, and then rent for a year or two. "Her financial picture is still in transition. If she gives up $100,000 of her limited liquidity, there is no way of getting that back," Clemens says.

"She could get a home equity loan, but with the alimony being short-term and a job situation that precarious, she may not qualify," Clemens adds. "She wouldn't have the cash flow to handle any large expenditures" such as home maintenance and repairs, or rising property taxes.

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Dr. Lois Vitt, founding director of the Institute for Socio-Financial Studies, says Jane's desire is understandable, because home ownership is deeply tied to identity. "A new role as homeowner not only expresses autonomy and freedom, but the beginning of new cherished life and a sense of security," says Vitt. "Long term, a housing investment is no more frivolous than a savings account that earns nothing."

But Vitt also thinks Jane should avoid tying up all of her cash. Instead, she recommends putting down 50%. "She might be able to find someone who wants to sell so badly they will [provide] a mortgage," Vitt says.

Don't use retirement funds to pay for the house, advises Carole Peck, a certified financial planner in Florida who specializes in women in transition. "She is sacrificing long-term security for short-term security," says Peck. "It doesn't seem that she has the earning potential to rebuild her 401(k) in way that will replenish her retirement funds. She needs to look at them as absolutely sacred."

Peck would like to see Jane put her resources into finding a better job, and then save up a down payment. "What if she gets a job, and that job moves her someplace else? She has a house she may not be able to sell," says Peck.

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"In working with people going through transition, there is always that anchor they try to find, that sense of stability," Peck explains. "They make decisions based on a very short time frame in their minds, and it usually isn't the best plan for the long term."

Even with a 100-pound dog, Jane can still find a home to rent for a few years, giving her a new start without the financial baggage of home ownership. Peck, who owns two German Shepherds, is a renter herself. "There are people who can't sell their homes and are more than willing to rent them because they need someone to cover the mortgage," she says.

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