Americans Are Dipping Into Their Retirement Funds

More Americans than ever are dipping into their retirement prematurely, and experts warn it could have serious consequences on their finances later in life.

A study by Vanguard that examined data from nearly 5 million people with retirement accounts, found a record 4.8 percent of account holders took hardship withdrawals from their 401(k) accounts in 2024, up from 3.6 percent in 2023. Hardship withdrawals allow savers to access their retirement funds early in cases of an urgent and significant financial need, but they are generally considered a last resort.

In the report, Vanguard noted that more employers are automatically enrolling workers in retirement plans, increasing the number of people who might not have otherwise saved, which can contribute to a larger share of pre-retirees dipping into their later-life funds. In 2023, 61 percent of 401(k)-type plans managed by Vanguard included automatic enrollment for new hires, a significant boost from 36 percent in 2014.

Congress has also recently made it simpler to access hardship withdrawals. A 2018 federal law eased restrictions and removed the requirement for employees to take out a loan before applying for a hardship withdrawal.

But despite it becoming easier to make withdrawals from retirement accounts, Patrick Marcinko, financial adviser at Bogart Wealth, told Newsweek that the uptick shows that "Americans are turning to their retirement plans due to the mounting financial pressures they face."

"While inflation has decelerated, prices are still much higher than they were before the pandemic," Marcinko said.

Vanguard found that the rates of hardship withdrawals were at 2 percent prior to COVID-19 hitting the U.S. in 2020.

"Housing and food costs, essential parts of any family's budget, have surged, while many salaries have struggled to keep pace," he said. "For those who have already depleted their emergency savings, tapping into retirement funds can seem like a tempting option."

Erica Sandberg, consumer finance expert at BadCredit.org, told Newsweek that while the idea of topping up your current income with your retirement savings may seem appealing, it can yield consequences down the line.

"Although the money invested in a retirement account—such as 401(k)—may be available at any time, if a person takes a distribution before the age of 59 and a half, they will be hit with a 10 percent penalty [on] that amount," Sandberg explained.

This fee can be no small sum. For example, a $10,000 early withdrawal could result in a $1,000 penalty.

"Income taxes will also be assessed at the regular rate, and if the amount taken out pushes the person up into the next income tax bracket, the net withdrawal will be a lot less than they may anticipate," Sandberg added.

However, it's not all bad news. Vanguard concluded that the hardship withdrawal rate remaining below 5 percent indicates that savers are "generally resilient" and are maintaining a "long-term approach to retirement saving."

In 2024, average account balances rose by 10 percent over 2023, reaching a record high of $148,200, which Vanguard says was driven by a strong stock market and higher contribution rates. Additionally, 45 percent of plan participants increased their savings rate in 2024—the highest percentage recorded since Vanguard began tracking this metric in 2019.