Gen Z Workers Tapping Into Retirement Savings
Nearly half of Gen Z employees, which includes those around 28 years old, are already accessing their retirement savings. A recent survey from a payroll integration company noted that 42% of these workers are using the funds to tackle debt, while another 25% cited emergency expenses as their reason for withdrawal.
“It’s generally not advisable to dip into retirement savings for non-retirement expenses,” says a certified financial planner from Massachusetts, Kevin Feig. Still, he points out that if someone is facing high-interest debt, like credit card balances, leveraging those savings might be a smart move.
Weighing the Benefits and Risks
Credit card debt can indeed feel overwhelming because of high interest rates, currently averaging around 24.36%, according to Lendingtree. While it might be tempting to use retirement funds to eliminate this debt, Feig emphasizes the need to “understand the pros and cons” before making such a choice.
On one hand, paying off high-interest debt can save you from further financial burdens and may lead to significant savings over time. On the other hand, accessing retirement savings involves serious trade-offs, including potential loss of market growth, tax implications, and penalties depending on the retirement account type. For instance, withdrawing from a 401(k) before age 59½ usually incurs a 10% penalty along with federal and state taxes, although exceptions exist for certain circumstances like medical expenses or disability.
“There are rare situations where early withdrawals make sense, particularly to avoid foreclosure or manage escalating credit card debt. However, one must manage those situations carefully,” notes Emijini, another certified financial planner from Chicago. “We can address current problems while also creating future challenges.”
Emijini advises looking into alternative options, such as starting a side hustle, selling items you no longer need, consolidating debt, or discussing hardship options with lenders.
Unpacking the Reasons Behind Debt
Even if you decide to use retirement funds to address credit card debt, it’s crucial to explore the reasons behind accumulating that debt in the first place. “If you don’t understand why you’re in this situation, it’s likely to happen again, even if you liquidate your retirement savings,” Feig warns.
Debt could stem from impulsive spending, lifestyle changes, or even covering emergencies. No matter the cause, breaking the cycle is essential, according to Emijini. She suggests some practical steps to uncover the “why” behind your credit card issues:
- Identify the cause. Whether it’s emergency repairs or shopping after a tough day, recognizing the reason for your debt is key to eliminating it.
- Rebuild your budget. If sticking to a budget has been tough, start fresh with a spending audit to identify patterns—like frequently eating out or overspending on convenience.
- Establish a safety net. Having an emergency fund can protect you from relying on credit for unexpected costs. Automating savings to a dedicated account can help build this safety net.
- Set spending boundaries. While trying to pay off debt, limiting every enjoyable expense might not be feasible. Striking a balance in your budget ensures you still have room for things you love.
- Increase your income. After cutting costs, consider ways to boost your earnings through salary negotiations or side jobs.
- Seek help. Sometimes, the reasons behind debt are more complex than numbers—they can be emotional or cultural. Consulting with a financial planner or therapist could provide support.
