Dipping Into Retirement Savings To Pay Off Debt: the Harsh Reality for Gen Z Homebuyers

In recent years, many Americans have found the dream of homeownership challenging. For Gen Z Americans (born between 1997 and 2012), the road to achieving this dream has been paved with several specific hurdles.

Inflation and high rates have made saving for milestone financial goals, such as buying a home, tricky. Compounding the economic issues, student loan repayment, stagnant wages, and a challenging job market have hindered many Gen Zers.

In fact, a recent Empower survey found that a whopping 45% of Americans with student loans “have delayed major financial decisions, such as buying a home or retiring, due to loan obligations.” Gen Z is hit the hardest: Their average monthly student loan payment stands at $526, compared to the total average of $284.

Now, a new report by Payroll Integrations found that these difficulties are translating into Gen Zers dipping into retirement savings to pay off debt—something that could have detrimental consequences down the line.

A majority of Gen Z Americans have dipped into their retirement funds to pay off debts

The new report found that while retirement withdrawals are “widespread across the workforce”—with 38% of employees overall saying they have dipped in their savings—the figure jumps to an eye-popping 46% for Gen Z.

This represents the highest withdrawal rate of any generation, compared with 31% for millennials and 41% for both Gen X and baby boomers.

In turn, it’s not surprising that a meager 3% of homeowners in the U.S. are Gen Zers, according to the 2025 National Association of Realtors® Home Buyers and Sellers Generational Trends study. This represents the smallest share of any generation alive today.

Another finding from the Payroll Integrations report is that a whopping 42% of Gen Zers who used their retirement funds did so to pay off debt. In comparison, only 6% of millennials and 17% of Gen X cited this reason to dip into their savings.

Ben Waterman, CEO of global consumer wealth management platform Strabo, says the issue is that these withdrawals are mostly being spent on essentials: covering emergencies, living costs, or keeping debt—like mortgages—at bay.

“This isn't simply down to Gen-Z profligacy: They have entered adulthood with rising costs of living, historic student loan burdens, and stagnant wage growth. When you add in inflation and all-time-high house prices, it's no surprise at all that they're carrying heavier debt loads than their predecessors,” he says.

Pitfalls of tapping into retirement funds to pay off any debt, including mortgages for those who have them

Using retirement funds to pay debt can have dire long-term consequences. First, you lose out on the years of compounding that will power your retirement savings, points out Bobbi Rebell, CFP, a consumer finance expert at CardRates.com.

“Time is the best investment choice and by cashing out early, you will make it so much harder later on to build true wealth. What makes it even worse is that you are in a sense backtracking because not only do you have to pay the taxes you didn’t pay when you put the money into the retirement account (assuming it was a traditional IRA or 401(k)), but you also have to pay a penalty so you are essentially worse off than if you had never contributed in the first place,” she explains.

Melanie Musson, insurance and finance expert at Clearsurance.com, also notes that mortgage debt, in particular, isn’t something you want to borrow from retirement to pay off.

“Mortgage debt typically has a lower interest rate than other types of consumer debt. Your money invested will typically earn higher interest than what you pay in mortgage interest,” she says.

Finally, Benjamin Schieken, mortgage professional and founder of Fincast, a mortgage shopping platform, says that another pitfall is the sacrifice of long-term security for short-term relief. Retirement funds are designed to compound over decades, and pulling money early undermines that growth.

“Even if it reduces debt today, the borrower may be costing themselves far more in lost retirement value,” he says, adding that a smarter strategy is to focus on the cost of debt rather than simply the balance.

For instance, lowering interest rates, reducing monthly payments, and managing the debt-to-income ratio will have a more sustainable impact than draining retirement savings.

“Debt itself is not always the problem. The cost of debt is,” he says.

What can Gen Zers do to become homeowners?

The dream of homeownership is alive and well for these young Americans, according to a recent Insurify survey, which found that 40% expect to buy a home in the next three years. Experts say there are several steps this cohort can take to achieve this goal.

Approach debt more strategically

For instance, Schieken says that they can achieve this by reducing or consolidating revolving debt, such as credit card debt, so that monthly payments shrink and debt-to-income ratios improve.

Shop around for the mortgage

He recommends doing this the same way you shop for a home.

“That is not just about affordability today but about reducing long-term interest costs and avoiding wasted money,” he says.

Look into loan or financing options

Courtney Klosterman, home insights expert at Hippo Home Insurance, says homebuyers, especially first-time homebuyers, may have access to loan options that can help them put a down payment on their dream home. A few common loan options are Federal Housing Administration loans (FHA), which aim to help people with lower credit achieve homeownership. In addition, United States Department of Agriculture (USDA) loans will provide no-down-payment mortgages to eligible buyers looking for a rural home. 

“Not all loans may be available, so make sure to check eligibility requirements and availability before applying,” she advises.

Pay down your existing debts

Klosterman says that existing debts can make the homebuying process more difficult for potential homeowners. Lenders in some states might be less likely to provide a mortgage to someone with a low credit score or a high debt-to-income ratio.

Build your budget accordingly

While you are most likely familiar with the idea of having to save for the down payment and mortgages, there are many hidden costs associated with homebuying that might sneak up on you, she warns.

This is consistent with Insurify’s survey, which found that current Gen Z homeowners report facing a range of unexpected expenses that are placing significant strain on their finances—expenses that will only increase with time. Insurify found that 30% of Gen Z homeowners underestimated these costs.

“When looking at your household budget, determine where you can cut back to set aside money for the homebuying process," Klosterman suggests. "You may also want to set up a dedicated contribution to your home savings that will become a fixed part of your budget while you’re saving up."