An Increasing Number Of Americans Are Taking Early Withdrawals From Their Retirement Accounts — What You Can Do Instead

Amid economic uncertainties and looming fears of a recession, American workers face a challenging financial landscape, marked by an alarming trend of early withdrawals from retirement savings. 

The Vanguard Investor Expectations Survey, conducted in October 2022, sheds light on this concerning development. Analyzing data from 5 million workplace retirement accounts, the survey uncovers a deepening sense of pessimism regarding short-term financial market prospects, compelling many to dip into their retirement funds for immediate liquidity.

Vanguard’s report reveals that hardship withdrawals from retirement plans have hit their highest level since 2004. Currently, 0.5% of workers are resorting to emergency withdrawals, a rate that eclipses those seen during both the COVID-19 lockdowns and the 2008-2009 financial crisis. The IRS sanctions such withdrawals only under conditions of “immediate and heavy financial need,” typically necessitating thorough documentation.

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Simultaneously, there’s been an uptick in 401(k) loans. As of October, 0.9% of Vanguard’s plan participants have taken out loans against their 401(k) accounts. Unlike hardship withdrawals, these loans are repaid with interest back into the participant’s account. However, they still pose a risk as they can lead to a permanent reduction in the retirement account’s balance and its potential for future growth.

Fiona Greig, Vanguard's global head of investor research and policy, interprets the increasing trend in retirement account withdrawals as an indicator of the declining financial health of U.S. consumers. Financial planners strongly discourage early withdrawals and 401(k) loans because of the long-term risks they pose to retirement security.

In response to these trends, financial experts suggest several alternative strategies to maintain financial stability and avoid early withdrawal penalties:

Reducing expenses: Evaluate your budget to identify areas where you can cut back on spending. This can help preserve your financial reserves and reduce the need to dip into retirement savings.

Liquidating nonretirement assets: Consider selling assets that are not part of your retirement plan, such as stocks, bonds or real estate, to raise cash without affecting your retirement savings.

Seeking assistance: Look into government programs or private assistance that can offer financial relief. This may include unemployment benefits, food assistance or utility subsidies.

Considering low-interest loans: Explore options like home equity loans or personal loans that offer lower interest rates compared to withdrawing from retirement accounts.

Building an emergency fund is also crucial for those not yet in financial distress. Financial advisers recommend saving at least three months’ worth of living expenses in a high-interest savings or money market account.

For people concerned about their retirement savings and financial future, seeking advice from a financial adviser can be invaluable. Financial advisers can assist in creating a comprehensive financial plan and preparing for retirement.

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*Jeannine Mancini has written about personal finance and investment for the past 13 years in a variety of publications, including Zacks, The Nest and eHow. She is not a licensed financial adviser and the content herein is for information purposes only and is not, and does not constitute or intend to constitute, investment advice or any investment service. While Mancini believes that the information contained herein is reliable and derived from reliable sources, there is no representation, warranty or undertaking, stated or implied, as to the accuracy or completeness of the information.