Why Millions Of Americans Are Tapping Their 401(k) Savings Early

A growing share of Americans are dipping into their retirement nest eggs to handle immediate financial challenges, underlining the economic strain many households are experiencing despite strong employment figures.

Last year, 4.8% of 401(k) account holders took early withdrawals for hardship reasons like paying medical bills or paying their home mortgage, according to data from Vanguard Group. It marks an all-time high, jumping from 3.6% the previous year and more than doubling the typical pre-COVID rate of about 2%.

The increase comes as Americans navigate contradictory economic conditions.

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While unemployment remains low—the Labor Department reported Thursday that jobless claims fell to 2,000 from the previous week to 220,000—and wages are rising, persistent inflation in essential categories like groceries continues to strain household budgets. The Wall Street Journal noted declining consumer sentiment alongside rising delinquencies in vehicle financing and credit card debt.

David Stinnett, head of strategic retirement consulting at Vanguard offered a measured perspective to the Journal, saying that while financial hardship itself isn’t positive, “having savings to turn to is a positive.”

Two key factors are driving the trend. Workplace retirement plans are becoming more widespread through automatic enrollment practices. Vanguard’s figures show that 61% of retirement plans under its management now automatically sign up new employees, compared to just 36% a decade ago.

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Second, regulatory changes have simplified the process of accessing retirement savings during difficult times. Legislation passed in 2018 removed the previous mandate to exhaust 401(k) loan options before requesting hardship distributions. Additionally, another law passed in 2022 created provisions for emergency withdrawals up to $1,000 annually without penalties, provided the money is returned before subsequent withdrawals.

Among those making hardship withdrawals last year, 35% did so to avoid foreclosure or eviction, down from 39% in 2023. About 16% used the funds to purchase or repair a home. The median withdrawal amount was $2,200, according to the Journal.