A growing number of Americans are withdrawing from their retirement savings to cover emergency expenses, with early withdrawals from 401(k) plans reaching record levels. According to Vanguard Group, which analyzed data from nearly 5 million 401(k)-type accounts, 4.8% of account holders took hardship withdrawals in 2024. This marks a significant increase from 3.6% in 2023 and is more than double the pre-pandemic average of 2%.
What are hardship withdrawals?
Hardship withdrawals allow individuals to access their retirement funds before the standard withdrawal age in cases of “immediate and heavy financial need.” These withdrawals are generally seen as a last resort due to the tax implications and permanent reduction in savings. The most common reasons for taking a hardship withdrawal include preventing foreclosure or eviction and covering medical bills.
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Why are more Americans taking hardship withdrawals?
The sharp increase in hardship withdrawals could indicate growing financial distress, but other factors may also be contributing to the trend.
More employers are automatically enrolling workers
Over the past decade, more employers have been automatically enrolling new hires in 401(k) plans. In 2024, 61% of 401(k)-type plans administered by Vanguard included automatic enrollment, compared to just 36% in 2014. This means more workers, especially those with limited savings, now have access to retirement funds, potentially leading to higher withdrawal rates.
Legislative changes have made withdrawals easier
Federal policy changes have also contributed to the increase. A 2018 law removed restrictions that previously required workers to take out a 401(k) loan before accessing a hardship withdrawal. By making it easier to withdraw funds, more people may be opting for this option during financial emergencies.
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The costs of early withdrawals
While hardship withdrawals provide short-term financial relief, they come with long-term costs. Typically, workers must wait until they are 59 1/2 (or 55 in certain cases) to withdraw 401(k) funds without penalty. Those who take an early hardship withdrawal must pay a 10% penalty on the amount withdrawn unless they qualify for an exemption. Additionally, the withdrawn funds are subject to income tax for individuals with traditional 401(k) accounts.
Unlike 401(k) loans, hardship withdrawals cannot be repaid or rolled into another retirement account. This means the money permanently reduces an individual’s retirement savings, potentially impacting their financial security in later years.
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A broader economic warning sign
The increase in hardship withdrawals is part of a larger trend suggesting Americans are facing mounting financial pressure. In 2024, credit card delinquencies in the U.S. hit their highest level in over a decade, and more people fell behind on car payments. Consumer confidence also declined as inflation and economic uncertainty weighed on household finances.
Some positive financial indicators
Despite concerns about financial strain, Vanguard’s report also included some positive news. The average 401(k) account balance increased by 10% in 2024, reaching a record high of $148,200. This growth was driven by a strong stock market and rising contribution rates. Additionally, 45% of plan participants increased their savings rate in 2024, the highest level since Vanguard began tracking this metric in 2019.
Vanguard concluded that while hardship withdrawals have risen, the rate remains below 5%, suggesting that most Americans are still maintaining a long-term approach to retirement savings. However, the continued rise in early withdrawals underscores the financial struggles many individuals face today.
