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Vanguard Says Workers Are Tapping Retirement Money Early, Recommends These Better Options


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.

For help strategizing for retirement and avoiding early withdrawals, consider matching with a vetted financial advisor for free.

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.

An added danger to hardship withdrawals is that participants often take out more money than their situation demands in order to pay the taxes and penalties that result. Workers must pay income tax on the money withdrawn, as well as an additional 10% penalty if they’re younger than 59.5. In some hardship cases, the penalty can be waived, such as when the money is used to cover unreimbursed medical expenses that total more than 10% of the worker’s adjusted gross income.

“The recent increase in households drawing on their employer-sponsored retirement accounts, however, could be a sign of some deterioration in the financial health of the U.S. consumer,” said Fiona Greig, Vanguard’s global head of investor research and policy.

Early withdrawals from retirement accounts are adamantly discouraged by financial planners because of the danger they can create in retirement when workers can no longer generate income. Planners also discourage loans, because they can permanently lower the account’s returns.

How to Avoid Early Retirement Account Withdrawals

People facing financial hardship are encouraged to cut their spending, liquidate non-retirement assets, seeking out government or private assistance or taking out a home equity or other low-interest loan.

People who aren’t yet in a financial crisis are encouraged to build an emergency fund to deal with unexpected financial hardships, with a recommended minimum of three months’ worth of living expenses, or as much as a year of living costs. One preferred strategy is to have money automatically taken from each paycheck and deposited to a high-interest savings or money market account so that the cash can be easily accessed in an emergency.

Bottom Line

According to a recent Vanguard Investor Expectations Survey, workers are prematurely tapping their retirement savings, a reality that could be exacerbated if the U.S. economy falls into a full-on recession in the coming months. Workers should explore alternatives to premature withdrawals from retirement accounts, which come with steep penalties, and should consider matching with a financial advisor for free to strategize building up their retirement accounts and creating an emergency fund.

Tips on Saving for Retirement

  • In order to be ready for retirement it’s important to make sure your finances are in order and that you’ve prepared properly for retirement. A financial advisor can help you create a financial plan, properly prepare your finances and help you know when the right time is for you to retire. Finding the right financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • If you know now when you’d like to retire, maybe it’s time to amp up the retirement savings. In an ideal world, you’re already contributing to your 401(k) if one is available to you, but are you using your employer match program? Not all employers offer 401(k) matching, but if yours does, you should definitely take advantage of it. Typically without much extra effort from you, you can benefit from free money hitting your retirement savings account each month.
  • Again, if all this calculating and planning is too daunting for you, you don’t have to go it alone. Think about getting a financial advisor. When looking for the right one, be sure to ask each advisor questions that will help you get a better feel of what he or she can offer. That way, you won’t end up with an advisor who specializes more in debt recovery than retirement planning.

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