Many Americans are feeling the tug on their finances, prompting a significant number of them to dip into their 401(k) savings sooner than planned. Despite a thriving job market with robust employment statistics, financial pressures are mounting, causing many to reassess their financial strategies.
In the previous year, 4.8% of individuals with 401(k) accounts took out early withdrawals citing hardship conditions such as medical expenses and mortgage payments, as reported by Vanguard Group. This figure marks a record high, with a leap from 3.6% the year before and more than doubling the typical pre-pandemic rate, which hovered around 2%.
This rise in early withdrawals is occurring as Americans face a mix of economic signals.
Even though the unemployment rate is low—highlighted by a Labor Department report noting a decrease in jobless claims to 220,000—wages are climbing and inflation remains stubborn, particularly affecting essential items like food. Concerns about declining consumer confidence are increasing, alongside a surge in late payments for auto loans and credit card debts, according to the Wall Street Journal.
David Stinnett, who leads strategic retirement consulting at Vanguard, pointed out in discussions with the Journal that while financial struggles are concerning, having savings to rely on is undoubtedly beneficial.
Two main factors are fuelling this trend. One is the growing prevalence of workplace retirement plans that now frequently use automatic enrollment. Vanguard’s data highlights that 61% of the retirement plans they manage now include this feature for new employees, a significant rise from 36% just ten years ago.
In addition, regulatory adjustments have made accessing retirement savings in tough times easier. Legislation passed in 2018 removed the need to first exhaust 401(k) loan options to qualify for hardship withdrawals. Plus, a 2022 law allows for emergency withdrawals up to $1,000 each year without penalties, provided the amount is repaid before any further withdrawals.
Of those who made hardship withdrawals last year, 35% did it to prevent foreclosure or eviction, down from 39% in the prior year. Another 16% used these funds for home purchases or repairs. The average withdrawal, according to the journal, was about $2,200.
Traditional 401(k) hardship withdrawals aren’t without costs. Withdrawn amounts are subject to income tax, and those under the age of 59 and-a-half usually face a 10% penalty.
Still, despite an uptick in early withdrawals, overall 401(k) balances increased by an average of 10% in 2024, hitting a new high of $148,153. The proportion of participants with outstanding 401(k) loans stayed stable at 13%, the same figure as the previous year.
As more employers not only automatically enroll workers but also incrementally increase their contribution rates—typically by around 1% per year until reaching about 10% of salary—401(k) plans are increasingly moonlighting as emergency funds for individuals grappling with financial emergencies.
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This piece originally appeared on Benzinga.com, where you can find further stock analyses and market updates. Remember, Benzinga offers information, not investment advice.
