Is Gen Z Already Destroying Their Retirement?

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Generation Z adults range in age from 18 to 28, but they’re already putting themselves in a financial hole by raiding their retirement accounts. Even with taxes and early withdrawal penalties as a deterrent, as many as 46% of Gen Z workers have already taken money out of their retirement accounts, according to the 2025 Employee Financial Wellness Report by Payroll Integration.

The consequences of this could be enormous, especially at their young ages. Beyond the immediate costs, the real killer is the loss of long-term compound growth.

Here’s a look at the stark reality in black and white, along with some suggestions of what Gen Zers can do instead.

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The Consequences of Early Withdrawals

As a young worker, it’s easy to see why an early retirement plan withdrawal might not seem like such a big deal. Taking out $500 from your retirement plan to cover your current expenses, for example, might actually feel like the right decision. If it means avoiding near-term consequences, such as having your lights turned out or being evicted from your apartment, it can definitely feel like the right answer. This is particularly true for younger workers, who likely think they have “plenty of time” to replace that $500, especially as their income grows. But the truth is that taking money out of a retirement plan prematurely can cause both short-term and long-term financial problems.

An early retirement plan withdrawal triggers two financial events: a 10% penalty and ordinary taxation. Even low-income earners in the 12% tax bracket will have to fork over 22% of the money they withdrew from their retirement plans, plus any additional state tax or penalties. For those in the highest tax brackets, that could tick up closer to 50%, or even more. And here’s the rub — most people taking money out of their retirement accounts for short-term needs don’t plan ahead and set some money aside for taxes and penalties. This can result in a nasty financial surprise come April 15, when taxes are due.

But over the long term, things are even worse. Not only do small withdrawals add up, but taking money out of your retirement accounts means you lose their future compounding potential. That’s how “just” $500 results in thousands of dollars of lost retirement savings.

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The True Hidden Cost: Real-World Example

Imagine a 25-year-old, near the top end of the Gen Z range, decides to withdraw $8,000 from their 401(k) to pay off student loan debt.

First, they’ll likely end up owing at least $1,760 in taxes and penalties, and perhaps as much as $3,760, not including state taxes or penalties. Granted, a Gen Zer in the very top tax bracket isn’t likely to need to withdraw $8,000 from their 401(k) plan. However, this illustrates the range of potential financial ramifications.

Even worse, however, is the long-term damage this Gen Zer will do to their nest egg. If that $8,000 remained in a 401(k) plan and earned an 8% average annual return, that amounts to a whopping $194,186 in lost retirement wealth. Throw in additional premature withdrawals and the math gets even worse.

While there’s an argument to be made for paying down debt as quickly as possible, in this scenario, the tradeoff is immense. That $8,000 may have relieved some short-term stress in terms of paying down the student loan, but it’s all but certain that by the time that Gen Zer retired, they would have much preferred the nearly $200,000 in retirement assets.

Alternative Courses of Action

There’s no denying the fact that many Gen Zers are in a financial bind. Between a tough job market, a higher cost of living and large outstanding student loan balances, budgets can be tight. But rather than thinking of retirement accounts as glorified emergency funds, Gen Zers should reframe their mindset and adopt basic financial strategies, including the following:

Build a real emergency fund: Contributing even $50 or $100 per month can be enough to build an adequate emergency fund over time. While the target number is often three to six months of income, even $1,000 can stave off a lot of minor financial emergencies. With a solid emergency fund, there will never be a need to tap a retirement account prematurely, so this is an essential first step.
Continue paying down debt: Many Gen Zers are swamped by a combination of student loan debt and credit card debt, not to mention auto loans and even home mortgages. But it’s important to attack that debt before it gets out of control and becomes a lifelong burden. Two common strategies to attack debt are the snowball method, in which you pay down the smallest balances first, and the avalanche method, which prioritizes the highest interest rates.
Automate, automate, automate: Automatic transfers prevent you from either forgetting to save or letting your emotions control your investments. If you stop contributing “just one month” to cover other expenses, it makes it that much harder to get back on track with your savings program.
Think of your retirement savings as an essential bill, the same as your rent or utilities: If you think of your long-term financial security as the necessity it is, you’re less likely to divert that money to any other short-term need.

The Bottom Line

Although the statistics regarding early retirement plan withdrawals are daunting, they don’t necessarily point to a hope-free future for Gen Z. The same report actually points out that 85% of Gen Zers are still contributing to their retirement plans, so it’s apparent that the generation does want to save and invest. A simple modification in mindset, along with financial tools like budgeting and cash-flow management, might be enough to get Gen Z back on track toward creating long-term wealth and financial security.

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This article originally appeared on GOBankingRates.com: Is Gen Z Already Destroying Their Retirement?