Nearly half (46%) of Gen Z workers — the oldest of whom are roughly 28 years old — have already tapped into their retirement savings, according to a recent survey by Payroll Integrations.
Of that group, 42% did so to pay down debt, the payroll software company found. Another 25% of Gen Z respondents used retirement savings to cover an emergency expense.
“It’s generally not advisable to use your retirement savings for anything other than retirement,” says Kevin Feig, a certified financial planner based in Massachusetts.
However, if you are dealing with high-interest debt like credit card balances, “it could be a worthwhile strategy,” he says.
Credit card debt can be overwhelming because interest rates — currently averaging about 24.36%, according to LendingTree — make any unpaid balances grow quickly. If you have enough stashed in your retirement savings, it may be tempting to wipe out your debt all at once, but it’s crucial to “understand the pros and cons” first, Feig says.
“Tapping into retirement savings is a significant sacrifice and therefore requires a substantial gain,” he adds.
The advantages to clearing out high-interest debt is that you’ll save yourself years of payments and potentially thousands of dollars in additional interest, Feig says.
The cons of using your retirement savings to pay off your debt include loss of time invested in the market and taxes and penalties, depending on the type of retirement account you’re withdrawing from.
If you withdraw funds from your 401(k) before age 59½, you’ll generally incur a 10% penalty and owe state and federal taxes on whatever you take out. You may be able to avoid the early withdrawal penalty in certain situations, such as if you have a permanent disability or high medical bills.
“There are rare cases where [early retirement withdrawals] can make sense, like preventing foreclosure or stopping high-interest credit card debt from spiraling. But the true cost must be weighed carefully,” Emi Gjini, a CFP based in Chicago, says. “You may solve today’s problem while creating a bigger gap for tomorrow.”
Gjini suggests exploring other avenues first, such as starting a side hustle, selling unused items, consolidating high-interest debt and talking about hardship options with your lender.
Address the ‘why’ behind your credit card debt
If you are in a position to clear out your credit card debt using retirement savings and you understand the pitfalls of doing so, you should still address the reason you have debt before making any transfers, both Feig and Gjini say.
“It’s critical to address the underlying root cause of the credit card debt to prevent liquidating retirement assets only to find yourself back in credit card debt at a later date,” Feig says.
You may have racked up debt through impulse purchases or general lifestyle creep, or maybe you used your card to cover an emergency. Whatever the reason, “solving the root cause is the key to staying out of the same cycle,” Gjini says.
She suggests a few steps you can take to find the “why” behind your credit card debt:
- Identify the cause. Whether you needed to use your credit card to cover an emergency car repair or you went on a shopping spree because you were having a rough time at work, Gjini says figuring out why you accumulated the debt is the first step to getting rid of it.
- Rework your budget. If you don’t stick to a regular budget, it’s a good idea to start, Gjini says. First, do a spending audit of the last month or two to see if there are patterns. “Frequent dining out or ride shares may signal you’re paying for convenience,” she says. “Once you see where your money is going, you can determine if it aligns with your values.”
- Build or rebuild your safety net. Having a well-funded emergency fund can help prevent you from putting your next unexpected expense on your credit card. Gjini recommends starting small and automating transfers to your savings account to build momentum.
- Set spending boundaries. It can feel like you have to quit spending on anything fun while paying down debt, but restricting yourself often isn’t the most realistic approach. Give yourself room in your budget to still do things you enjoy, but set boundaries to help yourself cut back. “These guardrails help you enjoy life without slipping back into debt,” Gjini says.
- Boost your income. If you’ve cut your expenses and gotten a handle on your spending, “focus on boosting income,” Gjini says. You can try to negotiate a raise at work or pick up a side hustle to bring in extra cash.
- Get help. “Sometimes the ‘why’ runs deeper than numbers, it’s emotional or cultural,” Gjini says. Getting professional help from a financial planner, accountability partner or therapist “can help unpack habits that lead to recurring debt.”
Want to stand out, grow your network, and get more job opportunities? Sign up for Smarter by CNBC Make It’s new online course, How to Build a Standout Personal Brand: Online, In Person, and At Work. Learn how to showcase your skills, build a stellar reputation, and create a digital presence that AI can’t replicate.
Plus, sign up for CNBC Make It’s newsletter to get tips and tricks for success at work, with money and in life, and request to join our exclusive community on LinkedIn to connect with experts and peers.
