6 in 10 Millennials Would Consider Cashing Out Retirement Savings in a Downturn. Here's Why That's a Huge Mistake

Tapping a retirement plan early is really bad news -- even when the market is crashing.

The past year has certainly been a tough one for investors. The stock market is down significantly since the start of 2022, and right now, many people are looking at year-to-date losses in their IRAs as well as their brokerage accounts.

But according to a recent report from Escalent, 60% of millennial investors say they'd cash out their IRAs or 401(k)s in the event of a large stock market downturn. And that's a really bad idea for a couple of reasons.

The penalties could be huge

Tapping or cashing out an IRA or 401(k) plan prior to age 59 ½ will generally mean facing a 10% early withdrawal penalty on the sum you remove. So, let's say you're spooked by the fact that your IRA balance has dropped from $50,000 to $45,000 over the past year due to stock market turbulence. Well, guess what? If you cash out your IRA, you'll effectively cause the same sort of damage.

In addition to being penalized for an early IRA or 401(k) withdrawal, if you cash out your retirement savings, you'll pay taxes on that sum unless you have your money in a Roth IRA or 401(k). That could result in a major bill.

You need savings later in life

Let's say you're old enough to tap your IRA or 401(k) without penalty, but you're not set to retire for another decade. In that case, cashing out your savings during a stock market downturn is still a poor choice. The reason? You're going to need that money later in life, once you're no longer working.

Social Security is only designed to replace about 40% of your paycheck if you're an average wage earner, and most seniors need a lot more income than that to pay the bills. So if you cash out your savings now, you may be tempted to spend it, leaving yourself with inadequate funds down the line.

Plus, while the stock market may be down now, it could easily bounce back. And cashing out a retirement plan means losing out on the option to invest that money and grow it into a larger sum.

Think long term

It's easy to see why a stock market decline might rattle investors to the point where they'd want to cash out their retirement savings, take the money, and run. But penalties aside, cashing out retirement savings during a downturn could mean locking in losses -- losses you might easily recover from by sitting tight and waiting for a stock market recovery.

In fact, it's actually upsetting to hear that millennials would be so quick to cash out retirement savings in a downturn, because people that age have many years ahead of them before wrapping up their careers. So if you're tempted to get out of the stock market due to volatility, try to remember that you have many years where you can make money in the market and grow wealth. And that's an opportunity you don't want to pass up.