The Pulse

Examining The Reasons Why Young Investors Dip Into Retirement Savings

Millennial and Gen Z investors cite education costs as one of the top barriers to retirement

A new study conducted by E*TRADE from Morgan Stanley reveals how paying for education, medical emergencies, and making large purchases are the top three reasons why investors withdraw from retirement savings.

StreetWise is ARLINGTON, Va.–(BUSINESS WIRE)–E*TRADE from Morgan Stanley today announced results from the most recent wave of StreetWise, its quarterly tracking study of experienced investors.

As graduation season comes to a close, results show the impact education costs have on investors just embarking on their investment journeys:

  • Young investors are withdrawing early to pay for education. Of the nearly half (49%) of investors under the age of 34 that said they have withdrawn from an IRA or 401(k) early, 20% said it was to pay for an education, followed closely by a medical emergency (19%).

 

  • Education costs loom large. Nearly two in three (63%) young investors said education costs or paying down student loans are barriers to saving for retirement.
  • They are looking for a lifeline. Over two in five (41%) young investors said education reimbursement was one of the top three benefits an employer could provide beyond traditional health insurance.

“The rise of education costs has been a pervasive challenge, so it’s no surprise to see the toll it has taken on young investors,” Mike Loewengart, Managing Director of Investment Strategy at E*TRADE from Morgan Stanley. “While drawing down on retirement savings may be tempting when you have a long runway to retirement, young investors lose out on the power of compounding. Further, early withdrawals can come along with penalties, so understanding the magnitude of the decision is critical.”

Mr. Loewengart offered additional investing and saving considerations for recent grads:

  • Focus on savings first. Building an emergency fund—3 to 6 months of living expenses as a good rule of thumb—is a great first step and can provide short- and long-term financial assistance. Once a safety net is created, consider paying down high-interest debt before creating a portfolio.
  • Lean on employee benefits. Prioritizing finances on top of beginning a new career can be difficult, but many employers provide benefits and tools to help ease the burden. Student loan repayment and education reimbursement offerings can help with education expenses, while employer matches to retirement contributions and financial coaching tools can better prepare you for a strong financial future.
  • Put your investing on autopilot. Once young investors have a handle on their debt, automatic investing may help them build their portfolios. The strategy allows investors to set up recurring investments on a schedule that works for them. Automatic investing may also help reduce risk through dollar-cost averaging by taking advantage of the natural ups and downs of the market.[1]

 

 

 

About the Survey
This wave of the survey was conducted from April 1 to April 11 of 2022 among an online US sample of 913 self-directed active investors who manage at least $10,000 in an online brokerage account. The survey has a margin of error of ±3.20 percent at the 95 percent confidence level. It was fielded and administered by Dynata. The panel is broken into thirds of active (trade more than once a week), swing (trade less than once a week but more than once a month), and passive (trade less than once a month). The panel is 60% male and 40% female, with an even distribution across online brokerages, geographic regions, and age bands. The <34 (Gen Z and Millennial) data set comprises 269 investors between the ages of 18 and 34.
About E*TRADE from Morgan Stanley and Important Notices
E*TRADE from Morgan Stanley provides financial services to retail customers. Securities products and services offered by E*TRADE Securities LLC, Member SIPC. Investment advisory services offered by E*TRADE Capital Management, LLC, a Registered Investment Adviser. Commodity futures and options on futures products and services offered by E*TRADE Futures LLC, Member NFA. Banking products and services are offered by Morgan Stanley Private Bank, National Association, Member FDIC. All are separate but affiliated subsidiaries of Morgan Stanley. More information is available at www.etrade.com.
[1] Automatic Investing and dollar-cost averaging do not ensure a profit or protect against loss in declining markets. Investors should consider their financial ability to continue their purchases through periods of low price levels.

 

Have you ever taken out money from an IRA or 401(k) before the age of 59.5 and, if so, for what?

Age <34

Q2’22

Yes (net)

49%

Yes, to pay for education

20%

Yes, for a medical emergency

19%

Yes, to make a large purchase

18%

Yes, because I became unemployed

15%

Yes, to simply spend on myself or my family

11%

Yes, to spend on a vacation

7%

Yes, for holiday expenses

5%

Yes, Other

2%

When it comes to your personal ability to save for retirement, how much of a barrier is each of the following?

Age <34

Q2’22

Healthcare costs

65%

Education costs or paying down student loans

63%

Living expenses like food or utilities

60%

Rent or mortgage

59%

Wanting to live for today

57%

Retail shopping and/or eating at restaurants

51%

Childcare

48%

Pet care

48%

Having a parent live with you

47%

Having an older child live with you

41%

Which of the following benefits that a potential employer could provide would be the most important to you, beyond traditional offerings like health insurance? (Top 3)

Age <34

Q2’22

Retirement plans

61%

Insurance other than health (e.g., life, legal, and auto)

60%

Education reimbursement

41%

In-office or digital financial wellness seminars

32%

Student loan refinancing

29%

Commuter benefits

26%

Gym discounts

21%

Product discounts

12%