With many Americans pinched by stubbornly high inflation in the economy, more Americans are turning to early withdrawals from retirement accounts to make ends meet — which could have consequences by the time retirement actually comes.
This is according to a study by Fidelity Investments.
“The percentage of plan participants taking an early withdrawal from a retirement plan has increased over the past five years,” the study found. “While 2020 was a unique year, as participants sought penalty-free distributions allowed under the CARES Act, since then, in-service distributions, plan loans, and hardship withdrawals are all on the rise. In fact, more than three times as many participants took a hardship withdrawal in 2023 than did in 2018.”
The fact that such withdrawals are increasing absent the penalty-free option granted by COVID-19 relief legislation punctuates the pressure felt by U.S. workers in these inflation-fueled times, the report explained.
This reality presents challenging implications for the U.S. retirement system, which was recently ranked at about the middle of the road in a global analysis of international retirement systems.
“Unexpected expenses can derail budgets, short-term financial goals, and even saving for retirement if employees don’t have savings available,” the report stated. “In fact, employees who lack emergency savings are more likely to withdraw money from their retirement accounts (e.g. 401K) to cover expenses, as it may be the only source of savings they have.”
While the report makes mention of challenges people may have with emergency expenses of $1,000, the Consumer Financial Protection Bureau (CFPB) has largely been focused on a much smaller figure: $400. In 2019, the Bureau launched a new initiative called “Start Small, Save Up” designed to better prepare Americans for the endurance of unexpected expenses via an emergency fund, as well as the necessity of saving money for the future.
But Fidelity says that employers should encourage their workers to establish an emergency fund of $1,000.
“Not all employees are in a position to accumulate emergency savings,” the study said. “Employees should start with establishing a monthly or weekly savings goal and avoid accumulating high-interest debt.”