The average American’s 401(k) balance plunged 4% in the latest fiscal quarter, attributed to an uptick in “hardship withdrawals” as consumers continued to get hammered by inflation, according to a new study.
Fidelity Investments found that the typical 401(k) fell from $112,400 in the second quarter to $107,700 in the latest three-month period ended Sept. 30 — a drop of nearly $5,000.
Individual Retirement Account (IRA) balances experienced a similar drop, falling to $109,600 from $113,800 in the same time period, according to Fidelity.
Fidelity reported that 2.3% of workers took out what the IRS considers a “hardship withdrawal” — for large, unexpected payments — up from 1.8% in the year-ago period.
These withdrawals are subject to income tax, plus a potential additional 10% tax if they’re made before age 59.5 or aren’t used for medical bills, school tuition or home repairs, among other immediate financial needs.
Eight in 10 respondents cited inflation as reason for their financial stress.
“The increasing use of hardship withdrawals and loans underscore the need to help retirement savers develop emergency savings, which Fidelity has found to be the No. 1 savings goal among employees, after retirement,” Fidelity wrote in its report.
The top reasons account holders took such withdrawals: to avoid eviction and to pay for medical costs, per Fidelity, which analyzed more than 45 million retirement accounts in a study earlier reported on by CNN.
Meanwhile, in-service withdrawals — for expenses that don’t fall under “hardships” and require tax and penalty payments — also rose in the third quarter to 3.2%, up from 2.7% in the year-ago period, Fidelity reported.
In another sign of sweeping financial stress, the percentage of account holders taking out loans against their 401(k) accounts also moved higher to 2.8%, up from 2.4% in 2022’s second quarter.
Outstanding loans on a retirement plan — which cap out at $50,000 or 50% of the account holder’s assets, whichever is less — also saw a subtle increase, from 17.2% in last year’s third quarter to 17.6% this year.
The latest figure is a whole percentage point higher than the all-time low percent of participants taking loans from their 401(k), 16.6%, which was achieved in early 2022.
Borrowers generally have to pay back loans taken out of retirement accounts within five years, with payments made at least on a quarterly basis.
Both 401(k)s and IRAs are retirement accounts, though the former is offered by employers while the latter is opened by an individual through a bank or broker.
No matter the retirement account, account holders aren’t intended to withdraw funds until age 59.5 — though Americans aren’t considered of retirement age until their 67th birthday.
According to Fidelity, 57% of American adults told the financial firm that they wouldn’t be able to afford a $1,000 emergency expense.
The increasingly difficult ability to stash funds away for a rainy day is underscored by the latest inflation figures, which remain uncomfortably above the Federal Reserve’s 2% target.
October’s Consumer Price Index climbed 3.2% from last year — a deceleration from the September’s 3.7% advance but a cold comfort to consumers who are still getting socked by stratospheric prices for just about everything.
Indeed, compared to October 2020, when the US was under a COVID-induced lockdown, prices are up a blistering 18.2%.
Meanwhile, President Joe Biden has been pushing his Bidenomics agenda that has consistently claimed to “reduce the [government’s] deficit” despite recently-released Treasury data showing the red ink has doubled over the past year, from about $1 trillion to $2 trillion (yes, with a “T”).