Young Investors Tap Retirement Savings as an Emergency Fund

By: James Flippin · May 19, 2023 · Reading Time: 3 minutes

Bull & Bear

According to a recent Bankrate survey, investor sentiment among the younger generations is a decidedly mixed bag.

53% of Gen Z and 43% of millennial investors are looking to increase their stake in stocks in the upcoming year. But on the flip side, inflation has influenced almost half of Gen Z and a third of millennials to either offload their stocks or refrain from adding to their portfolios this year. The funds are being redirected to cover the higher cost of living.

Together, these indicate a clash between financial ambitions and the hard-hitting economic circumstances.

New Rainy Day Fund

In an unexpected twist, financial experts are noting an evolution in young investors’ perceptions of retirement accounts. These accounts, traditionally viewed as long-term investments, are more commonly being treated like savings accounts.

According to recent data from Voya Financial, 48% of investors, ages 18 to 34, admit their retirement savings account doubles as their primary emergency fund.

This unorthodox use of retirement accounts highlights the adaptability of younger generations in the face of economic hardships, however, the ultimate costs are yet to be seen.

The 401(k) Gamble

The growing trend among young investors is causing experts to raise eyebrows.

Many young investors are tapping into their 401(k) accounts to finance ventures ranging from real estate purchases to starting businesses, and exploring side gigs. However, these financial moves don’t come without potential consequences, such as possible stock losses, penalties, and unforeseen tax burdens. Some costs — like losing out on the long-term gains of compound interest — may not be fully felt for years to come.

An emergency fund can play a crucial role in safeguarding one’s financial health. Rather than tapping into an account with penalties for early withdrawal, having money set aside to deflect unforeseen fiscal curveballs can diminish the need to carry high-interest debt and offer an economic lifeline during periods of unemployment. As such, an emergency fund can additionally offer peace of mind.

Making your money work for you is all about balancing the present with the future. Setting actionable goals and regularly stockpiling what you can is a great way to get started.

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