More Americans are raiding their retirement accounts as the cost of living climbs, and experts predict that the number of workers drawing on their 401(k)s to pay for financial emergencies may increase due to a confluence of factors, like new provisions that make withdrawals easier and high inflation that is straining household budgets.
“It’s just more expensive to live these days, and that’s what’s putting the pinch on participants,” said Craig Reid, national retirement practice leader at Marsh McLennan Agency, a workplace benefits company. “Some of it is still spillover from the Covid pandemic. A lot of it is inflation — just the grind of daily life.”
Mark Scharf, an information technology worker in New York City, has taken money out of retirement accounts three times since the 2008 recession. He withdrew more than $50,000 to pay credit card debts, tuition for his six children to attend a religious school and, most recently, an overdue mortgage.
“It was really a choice of saving the present versus securing the future,” he said. “My situation wasn’t someone who’s frivolous. Expenses were just more than I was making.”
Now working in the public sector and paying into a pension, Mr. Scharf, 55, calculates that if he retires at 70, he can draw 40 percent of his former salary. As much as his retirement accounts have functioned as circuit breakers to reset his debts, he’s relieved that he doesn’t have the option of withdrawing his pension contributions.
“I don’t want to have to do that anymore, so I’m forcing myself not to,” he said.
Mr. Scharf has plenty of company, especially recently. Two large retirement plan administrators, Fidelity and Vanguard, have observed increases in hardship withdrawals, which may be taken only if there is “an immediate and heavy financial need,” according to the Internal Revenue Service. Fidelity found that 2.4 percent of 22 million people with retirement accounts in its system took hardship withdrawals in the final quarter of 2022, up half a percentage point from a year earlier. A similar analysis by Vanguard found that 2.8 percent of five million people with retirement accounts made a hardship withdrawal last year, up from 2.1 percent a year earlier.
In the first three months of 2023, Bank of America found that the number of people taking hardship withdrawals jumped 33 percent from the same period a year earlier, with workers taking out an average of $5,100 each.
“Customers are much more aware that their retirement accounts are not sacrosanct,” said Steve Parrish, adjunct professor and co-director of the Center for Retirement Income at the American College of Financial Services. “The trend has already started. People are realizing their 401(k)s aren’t locked until they’re 60.”
Some experts warn that this could be just the tip of the iceberg, pointing to the many American families struggling with higher costs. Although the personal savings rate hit a high of nearly 34 percent in April 2020 because of Covid lockdowns and stimulus payments, it has since fallen to about 5 percent, according to the U.S. Bureau of Economic Analysis.
“What this uptick in hardship withdrawals overall signals is, across the board, people don’t have enough short-term savings,” said Kirsten Hunter Peterson, vice president of thought leadership for workplace investing at Fidelity. “When that inevitable unexpected expense comes up, people might have to look to their retirement account,” she said.
What’s more, people often have to withdraw more money than the amount they need in order to cover federal income tax and a 10 percent early-withdrawal penalty if they don’t qualify for a waiver. Waivers can be granted for a limited number of circumstances, such as death or permanent disability.
“The cost of living is definitely tipping clients over the edge at this point,” said Sarah Honsinger, a credit counselor at Apprisen, a nonprofit debt management organization.
Ms. Honsinger added that the CARES Act, which temporarily relaxed restrictions around hardship withdrawals in 2020, triggered an increase in withdrawals from retirement accounts.
Lawrence Delva-Gonzalez, who runs a personal finance blog called the Neighborhood Finance Guy, said he observed people in the Haitian American community of Miami, his hometown, turning to their nest eggs during the worst of Covid without a clear view of the long-term repercussions.
“When it came to the pandemic and word got out that you could take out the money early without penalty, they did,” he said.
Mr. Delva-Gonzalez said he worried that a lack of financial literacy imperiled marginalized workers like them. “My community has almost no access to it,” he said.
With their retirement money gone, these workers face…
Read More: 401(k) Hardship Withdrawals Tick Up as Inflation Stays High