(SmartAsset) - Workers are prematurely tapping their retirement savings, a sign that households are coming under increased financial pressure, a troubling development that’s likely to get worse if the U.S. economy falls into recession in the coming months.
According to the recent Vanguard Investor Expectations Survey, “Investors are feeling more pessimistic about the short-term outlook for financial markets and more of them are having to tap their retirement savings for cash,” based on October 2022 data drawn from 5 million workplace retirement accounts managed by the mutual fund giant.
The number of hardship withdrawals from retirement plans managed by Vanguard has risen to the highest level since 2004, according to Vanguard, with 0.5% of workers taking money out for an emergency. The total of 250,000 hardship withdrawals is worse than during the COVID-19 lockdowns and during the great recession of 2008 and 2009. The withdrawals are allowed only for what the IRS calls “an immediate and heavy financial need” that often needs to be documented.
Another sign of financial pressure among workers is the increase in people take loans against their 401(k) accounts, which surged during the great recession to more than 1%. As of October, Vanguard reported 0.9% of plan participants taking out loans.
While 401(k) loans are repaid with interest to the participant’s account, hardship withdrawals can’t be repaid. Under IRS “safe harbor” rules, workers can take money out for medical expenses, college expenses, rent or mortgage payments to prevent eviction or foreclosure, funeral expenses and home repairs.
Hardship and other premature withdrawals from 401(k) and similar workplace accounts can be especially risky for a worker’s future retirement security because the account balance is permanently lowered, leaving less cash to generate future returns.
Workers are prematurely tapping their retirement savings, a sign that households are coming under increased financial pressure, a troubling development that’s likely to get worse if the U.S. economy falls into recession in the coming months.
According to the recent Vanguard Investor Expectations Survey, “Investors are feeling more pessimistic about the short-term outlook for financial markets and more of them are having to tap their retirement savings for cash,” based on October 2022 data drawn from 5 million workplace retirement accounts managed by the mutual fund giant.
The number of hardship withdrawals from retirement plans managed by Vanguard has risen to the highest level since 2004, according to Vanguard, with 0.5% of workers taking money out for an emergency. The total of 250,000 hardship withdrawals is worse than during the COVID-19 lockdowns and during the great recession of 2008 and 2009. The withdrawals are allowed only for what the IRS calls “an immediate and heavy financial need” that often needs to be documented.
Another sign of financial pressure among workers is the increase in people take loans against their 401(k) accounts, which surged during the great recession to more than 1%. As of October, Vanguard reported 0.9% of plan participants taking out loans.
While 401(k) loans are repaid with interest to the participant’s account, hardship withdrawals can’t be repaid. Under IRS “safe harbor” rules, workers can take money out for medical expenses, college expenses, rent or mortgage payments to prevent eviction or foreclosure, funeral expenses and home repairs.
Hardship and other premature withdrawals from 401(k) and similar workplace accounts can be especially risky for a worker’s future retirement security because the account balance is permanently lowered, leaving less cash to generate future returns.
By Brian J. O'Connor
