Increasing Number of Americans Tapping 401(k) Funds for Urgent Expenses

A growing financial strain is prompting more Americans to dip into their 401(k) retirement savings to cover immediate expenses.

Bank of America reports a 13% surge in 401(k) plan participants taking hardship distributions between the second and third quarters, with the figure now reaching 18,040, the highest level in at least the past five quarters. This trend indicates rising consumer financial stress, even in a period of high GDP and low unemployment.

Financial Hardships on the Rise

Despite seemingly positive economic indicators, some Americans are facing cash shortages, making it challenging to meet their financial obligations. The uptick in 401(k) hardship distributions may be attributed to the effects of high inflation and the increasing cost of living, as noted by Lisa Margeson, managing director of Bank of America's retirement research and insights group.

Shifting to Costly Debt and Retirement Savings

As Covid-era savings dwindle, individuals are resorting to costly borrowing through credit cards. Despite record-high interest rates, credit card balances have surged by $148 billion over the past year to a total of $1.08 trillion, according to a New York Federal Reserve report. Simultaneously, the report highlights a rise in newly delinquent households in credit card payments, the highest level in twelve years. Some people are turning to their retirement accounts as a source of cash.

Rising 401(k) Hardship Distributions

Bank of America's data reveals a 27% increase in the number of 401(k) participants taking hardship distributions from the first quarter of the year. The average withdrawal amount remains steady at $5,070. The bank's client employee benefit programs encompass more than four million plan participants.

Significant Financial Impact

In the third quarter, 0.59% of 401(k) participants opted for a hardship distribution, up from 0.52% in the second quarter and 0.49% the previous year. It's important to note that withdrawals from 401(k) plans due to financial hardship are taxable and are not repaid to the account. Experts generally advise against tapping into 401(k) funds for emergency expenses due to the potential loss of expected market growth over years or decades.

Encouraging Retirement Saving Amid Challenges

Despite the financial challenges, Bank of America's findings indicate that 401(k) contribution rates remained stable at 6.5% during the third quarter. Furthermore, a positive note reveals that 21.3% of Gen Z and 10.4% of Millennials are increasing their contribution rates, with only a small percentage reducing their retirement savings. Maintaining and even increasing contributions can provide a solid foundation for a secure financial future.

The rise in Americans accessing their 401(k) savings to address immediate financial needs underscores the ongoing financial challenges faced by individuals, despite the broader economic context. While tapping into retirement savings can provide short-term relief, it's crucial for individuals to explore alternative financial strategies and minimize such withdrawals whenever possible to secure a more stable financial future.