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Americans Are 3x Likelier to Take a Hardship Withdrawal. But Fidelity Says Doing This Can Protect Your Retirement Savings


Americans are, in growing numbers, relying on their retirement accounts to pay the bills. More specifically, hardship withdrawals from 401(k) and related plans are up. This is shown as a result of numerous studies conducted over 2023, including a new report issued by Fidelity.

To address this, Fidelity urges employers to help their employees prepare for unexpected expenses with structured emergency funds. As 401(k) hardship withdrawals soar, Fidelity says, this has become a more urgent issue than ever.

Do you have questions about saving for retirement and managing your 401(k)? Speak with a financial advisor today.

Hardship Withdrawals Have Increased in Recent Years

In 2018, about 2.1% of households with a 401(k) withdrew money to pay for a financial hardship each year. By the middle of 2023, that rate had more than tripled to 6.9%. Over that same period, the number of households taking a 401(k) loan dropped, meaning that more people need to take out money that they don’t think they’ll be able to pay back.

The clear signal appears to be that more households are in need, hitting expenses that they cannot afford on their ordinary incomes. The big question is why. 

Many outlets who have reported on this issue suggest inflation is a significant, if not the singular, factor. In reporting on this issue, the New York Times cited “high inflation that is straining household budgets” and quoted one expert who argued that it is “just more expensive to live these days… A lot of it is inflation, just the grind of daily life.”

However, the data suggests several reasons to be skeptical of an inflation-first argument.

Financial Crises Appear to Drive Hardship Withdrawals

Hardship withdrawals began to rise at least five years ago, when inflation rates were under the Federal Reserve’s 2% benchmark. In fact, setting aside the surge in 2020, the largest year-over-year increase in hardship withdrawals occurred between 2018 and 2019, when inflation was near its lowest in recent memory, according to These withdrawals have also continued to increase even while inflation has fallen steadily over the course of 2023.

Wage data also suggests that inflation has not actually reduced most households’ spending power. When researchers at Wharton School of Business looked into the issue, they found that wage gains have largely, if not entirely, offset the higher costs of inflation in recent years. The only significant outliers are households earning more than $100,000 per year, in which wage gains have far outpaced inflation, and households earning less than $20,000 per year, in which inflation has significantly outpaced wage gains. 

While this last group is, indeed, financially worse off due to higher prices, they are also unlikely to drive higher rates of hardship withdrawals, as they are usually the least likely to have a 401(k).

The upshot is that it’s far more likely that rising hardship withdrawals meet the IRS’ traditional definition of an “immediate and heavy financial need,” one caused by a lack of savings and income rather than eroded spending power due to higher prices. Typically this constitutes sudden, urgent issues such as medical bills, car and home repairs or unexpected moving expenses.

Emergency Funds Can Help Prevent These Withdrawals

The problem, as Fidelity notes, is that hardship withdrawals can severely impact a household’s ability to save for retirement. In fact, as reported by CBS News, on average households will take between $2,200 and $3,900 from their retirement accounts for these emergency expenses. This often causes to a permanent dip in the 401(k) and overall savings.

To manage this, Fidelity recommends building up an emergency fund. Households with dedicated short-term savings, as opposed to their 401(k), “are more financially confident, have higher financial wellness scores and more likely to be ‘on track’ for retirement.”

Even putting a little bit aside each week or each month can help build up this kind of savings account for unexpected expenses. This is even easier since the passage of SECURE 2.0, which allows employers to build matching contribution programs for emergency savings. It will not just make life less stressful today, it’ll also make retirement that much easier.

Bottom Line

Over the past five years, 401(k) hardship withdrawals have more than tripled. The best way to prevent this is to make sure you have a fund set aside for emergency expenses at need. If not, you risk significantly setting back your long-term retirement savings in the process.

Retirement Savings Tips

  • A financial advisor can help you build a retirement plan for the future. Finding a 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 have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • SmartAsset’s 401(k) calculator can help you build a plan around how your retirement savings will evolve in your own account.

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