Most young investors claim they are going to invest more money in the stock market this year compared to 2022 but, in fact, many of them have been doing exactly the opposite.
That’s according to Bankrate, which released a new survey Wednesday that found 53% of Gen Z and 43% of millennial investors said they expect to put more money into stocks in 2023, much more so than Gen X (19%) and baby boomers (9%).
Yet Bankrate chief financial analyst Greg McBride said the two younger cohorts have done exactly the opposite so far this year.
Related links:
70% of Americans “financially stressed”, CNBC survey finds
Amid economic uncertainty, recession talk, how to save, invest
When taking out a 401(k) loan actually ‘makes sense’
“What we see among younger investors is a much higher propensity to have been taking action so far here in 2023 in the face of things like elevated inflation or the higher returns that are available on safe-haven cash investments,” McBride said. “And there was an increased likelihood of selling or withholding investment rather than buying in response to that.”
Almost half of Gen Z and one-third of millennial investors sold stocks or didn’t buy more this year due to elevated inflation, Bankrate found. And more than a third of Gen Z and one-third of millennial investors either sold stocks or didn’t buy more — 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 tapping stock-heavy retirement and other investment accounts to cover everyday expenses.
“For a lot of them, that stock market account is not necessarily that set-it-and-forget-it, like their predecessors have been taught,” he said. “A lot of them are using it pretty actively and treating it as 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 2 out of 5 American workers said their retirement savings plan is their only form of emergency savings. And that was truer for younger investors ages 18-34. Nearly half (48%) in that age group said retirement savings is the only significant form of emergency savings they have.
Having less in emergency savings will cost you
Anchiy | E+ | Getty Images
According to Voya’s own retirement data, employees without adequate emergency savings are 13 times more likely to take a hardship withdrawal from their 401(k) plan. Depending on the reason for the withdrawal, workers may have to pay a 10% penalty plus taxes when they make an early withdrawal from a traditional 401(k) or workplace retirement plan.
Awoye said many young investors are opting to take out 401(k) loans to fund other investments, like buying real estate, starting a side gig or building their own business. Yet some may believe they’re simply borrowing money that they’ll pay back to themselves without considering the impact of selling stocks at a loss and facing penalties and taxes.
Missed payments and interest on a 401(k) loan are considered a taxable distribution and the IRS will make you pay an additional 10% tax on that money if you take the money out before you’re age 59½. In the case of a job loss, the loan often must be immediately repaid in full.
SIGN UP: Money 101 is an 8-week learning course to financial freedom, delivered weekly to your inbox. For the Spanish version, Dinero 101, click here.
This story originally appeared on CNBC
