Young investors sell stocks and use their pension plans for emergencies

Most young investors claim that they will invest more money in the stock market this year compared to 2022, but in fact many of them have done exactly the opposite.

This emerges from data from Bankrate, which were published a new poll As of Wednesday, 53% of Gen Z and 43% of Millennial investors said they expect to put more money into stocks in 2023, far more than Gen X (19%) and Baby Boomers (9%).

However, Greg McBride, chief financial analyst at Bankrate, said the two younger cohorts have done the opposite so far this year.

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“What we’re seeing with younger investors is a much higher willingness to take action here in 2023 in the face of things like elevated inflation or the higher returns that are possible on safe haven investments,” McBride said. “And there was an increased likelihood of selling or holding back investments in response, rather than buying.”

Bankrate found that nearly half of Gen Z and a third of Millennial investors either sold or stopped buying stocks this year due to increased inflation. And more than a third of Gen Z and a third of Millennial investors have either sold or stopped buying stocks due to higher returns on safe haven investments like savings accounts, money market funds, CDs and government bonds.

Financial advisor Jordan Awoye of Awoye Capital in Bay Shore, New York, said many young investors are turning to stock-rich retirement and other investment accounts to meet their day-to-day expenses.

“For many of them, the stock account isn’t necessarily a ‘set it and forget it’ like their predecessors were taught to be,” he said. “A lot of them use it quite actively and treat it like a savings account plus.”

Awoye said younger investors are more likely than older investors to use retirement funds or money in a brokerage account to pay off credit card debt, buy real estate, or invest in their own business.

Recent data from Voya Financial found that two in five American workers say their retirement plan is their only form of emergency savings. And that was even more true for younger investors aged 18 to 34. Almost half (48%) in this age group said that retirement is the only significant form of emergency savings they have.

According to Voya’s own retirement data, employees are 13 times more likely to retire without adequate contingency plans a hardship withdrawal out of their 401(k) plan. Depending on the reason for exit, employees may face a 10% penalty plus tax if they exit a traditional 401(k) or company pension plan early.

According to Awoye, many young investors choose to take out 401(k) loans to fund other investments, such as buying real estate, starting a side hustle, or starting their own business. Still, some may believe that they are merely borrowing money that they will pay back to themselves, without considering the implications of selling shares at a loss and the penalties and taxes that may ensue.

Missed Payments and Interest on a 401(k) Loan are considered a taxable distribution and the IRS will require you to pay an additional 10% tax on this money if you withdraw the money before you are 59½ years old. In the event of a job loss, the loan often has to be repaid in full immediately.

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