Financial attitudes are changing with America’s young adults. For decades, parents have taught their kids that part of proper planning included saving for retirement. Saving could be accomplished with investment accounts, individual retirement accounts or any one of a litany of employer-sponsored retirement plans, including the 401(k). But there’s a trend among young savers to withdraw money from their 401(k)s to pay for things completely unrelated to retirement.
A survey commissioned by TD Ameritrade found that millennials are more likely than either Generation X or Baby Boomers to tap retirement funds for things that have nothing to do with retirement. The survey sampling was 1,015 U.S. adults aged 23 and older with at least $10,000 in investable assets.
53% of millennials said they would draw from retirement savings to spend during a job loss, 52% to cover medical bills and 52% to fund their child’s education. 48% said they’d pull from retirement savings to pay down credit card debt, 47% to buy a house, 45% to cover living expenses during a sabbatical from work, 45% to cover living expenses during parental leave and 45% to make a move.
More than 40% said they would take money from retirement funds to buy a car, pay for a vacation, cover wedding expenses or pay down education debt.
Using retirement money for non-retirement expenses can have huge consequences.
- If the money is withdrawn before age 59 ½, except in rare circumstances, you have to pay federal and state income taxes on the amount of the withdrawal plus a 10% IRS penalty. The penalty can be avoided if the person is permanently disabled and can’t work, has certain medical expenses, or there’s a divorce decree requiring the division of funds with a spouse. But even under those circumstances, taxes have to be paid unless the money comes from a Roth IRA or Roth 401(k).
- If the money is taken as a loan from a 401(k) and you leave that employer before the load is repaid any outstanding balance is considered an early distribution and you have to pay federal and state taxes, plus the 10% IRS penalty if you’re younger than 59 ½.
- But no matter what the reasons for withdrawing from your 401(k) before retirement, you lose the growth potential for the money. In almost every situation, withdrawing early can mean you have less at retirement than you could have.
72% of behind millennials thought they would be able to catch up on retirement savings, with about six in 10 expecting to be able to retire by the age of 65.
Why are millennials so willing to use retirement money now? The nonprofit organization New America published a report showing that 18-to 34-year-olds earn less than that age group in the 1980s and an irregular flow of income could be why. Researchers found:
- Freelance and contract work usually does not provide access to employee benefits and contributed to an overall decline in income.
- Millennials, born between 1981 and 1996 are more likely to be living in poverty than Gen-Xers (1965-1980) and Baby Boomers (1946-1964) at similar ages.
- Lower income is causing millennials to delay getting married
- More millennials are living at home with family.
- Millennials are waiting to have babies.
The study also found that those born between 1980 and 1989 have better educations, but paid higher tuition and are saddled with student loan debt.
Whatever the reasons, experts agree that using retirement money before retirement is almost always a bad idea and may create a more massive retirement problem for millennials than the one that exists today.