The surprising reason why 401(k) ‘hardship withdrawals’ are surging

The cost of living crisis is forcing Americans to make difficult trade-offs between saving for retirement and making ends meet.

According to a new Vanguard report, the number of “hardship withdrawals” from 401(k) plans spiked by 39% in 2023 and has doubled since 2021, when the pandemic allowed Americans to pad their savings.

Overall, 3.6% of Americans with Vanguard retirement plans initiated hardship withdrawals in 2023, up from 2.8% the year before. It was the highest withdrawal rate since 2019.

“Hardship withdrawals allow participants to access a portion of their savings when they have a demonstrated financial hardship, such as receipt of an eviction or home foreclosure notice,” Vanguard said.

Legislative changes in 2019 made it easier for retirement planners to tap into their 401(k)s in the event of a financial emergency, most of which were housing affordability challenges, according to the report.

“In 2023, 39% of hardship withdrawals were used to avoid a home foreclosure or eviction, up from 31% of withdrawals two years earlier,” the investment manager said.

Foreclosure rates inched higher in May, a clear sign that more homeowners were struggling to keep a roof over their heads.

Experts say low-income households are at the biggest risk of foreclosing on their homes and draining their savings—a one-two punch that could prevent them from ever retiring comfortably.

Retirement is becoming a distant fantasy for millions

While the percentage of hardship withdrawals remains small, finance expert Brett Arends believes they can have a “cumulative effect” on the nation’s poorest households, who already struggle with a lack of savings.

“[T]he cumulative effect of these annual withdrawals will add up over time, and will make worse what looks like a looming divide between those who have enough for retirement and those who don’t,” Arends wrote.

Arends quoted recent Fed data, which showed that the poorest 25% of U.S. households have only accumulated an average of $1,600 in financial assets.

For millions of other Americans approaching retirement age, the picture is even more dire.

According to the Government Accountability Office (GAO), most Americans in the lowest 20% of income quintiles don’t have any savings while being just a decade away from retirement.

In 2019, only one in 10 low-income workers aged 51 to 64 had a retirement account balance. In 2007, this figure was one in five. There’s reason to believe things have gotten worse since the pandemic as more Americans struggle with high living costs.

Inflation is also taking a bite out of retirement savings. According to a Primerica survey, 46% of middle-class households said they cut back or paused their savings in the first quarter of 2024 due to rising expenses.