The desire to own a home is a fundamental part of American culture. However, due to high housing prices, home ownership is becoming increasing difficult to access for the young American population, and a portion of Gen Z is considering the risky approach of using retirement savings as a means to afford a primary residence.
Gen Z Americans are beginning to face the consequences of this risky approach. Retirement accounts, 401(k)s, and IRAs, are significant long-term savings accounts. Cumulatively, drawing from these accounts is estimated to cost to the Gen Z population $195,000 in lost retirement savings, and potential savings over a lifetime.
The Temptation of Early Withdrawal
Desperation is a powerful driving force. When Gen Z Americans face a median home cost of $420,000 nationwide, it can make using retirement savings appear to be the only solution in the vicious cycle of renting. The IRS does allow for first-time home buyers to withdraw $10,000 from a traditional IRA without the 10% penalty, however, this and other alternatives for paying down retirement savings is still a risky approach in the long-term.
The Cost of Borrowing From Your Future
The $195,000 figure isn’t an arbitrary amount; it signifies how much this money would have earned if it remained in an account for retirement. By age thirty, losing just a little money would mean losing a fortune in retirement accounts due to compound interest. “When you pull money out of your retirement account at 25, you’re not just losing that initial amount,” says Rebecca Martinez, a certified financial planner. “You’re losing decades of potential investment growth. That $10,000 withdrawal could have grown to nearly $150,000 or more by the time you’re 65.”
On the other hand, withdrawals from traditional 401(k) accounts are treated as income, and you get penalized taxes. Moreover, the 10% penalty for early withdrawal, if you do not meet other conditions, causes approximately 30-40% of your withdrawal to disappear due to taxes.
Other Alternatives to Purchase a Home
Instead of taking money from retirement accounts, there are other options for would-be homeowners that are much better for your finances. First-time homebuyer programs give you loan options that are more affordable, and include down payment assistance, without harming your financial health. In fact, many younger home buyers can access market entry assistance through grants or low-interest loans from local and state governments.
With only 3.5% down, buying a home becomes less difficult without having to touch your retirement savings. Some conventional loans, for qualifying first-time buyers, offer down payments as low as 3%. Putting money aside to buy a home will take more time, but it will help avoid the loss of costly penalties, growth, and protect your retirement timeline.
Gen Z Australians
Since homeownership is a crucial goal to accomplish, the retirement loss which comes from it is a negative creating a long line of negative effects. The long-term effects of starting retirement savings again at 30 or 40, after already having it set up is far worse than the short-term benefits of homeownership.
Withdrawing retirement funds is a terrible mistake, especially for someone in Gen Z. Working with a financial planner could help find, buy a home without using strategies that would put your life in a financial bind. Retirement accounts should be avoided as much as possible since it is your wealth for the future. Working into your seventy’s or drastically less money after retirement are two terrible predictions from having a retirement account to much work into it.
