A new report on retirement accounts found that early withdrawal activity increased in 2024, with more participants initiating a “hardship withdrawal.”
A “hardship withdrawal” is when someone takes money out of a retirement account, such as a 401(k), before reaching retirement age, and it can be made only for immediate and heavy financial needs. The IRS defines such needs as expenses related to medical care, mortgage assistance, tuition, payments to prevent eviction or foreclosure, and funeral costs.
“We cannot tell for certain from this data what the root cause of the increase in hardship withdrawals was,” Laura Cope, who works in Vanguard public relations, told The Epoch Times via email.
While the increase from 3.6 percent to 4.8 percent might not seem huge at first glance, in retirement data terms it’s a noticeable shift, said Melissa Cox, a certified financial planner at Future Focused Wealth.
“What it reflects is a growing number of people who are feeling financial strain deep enough to dip into their future security,” Cox said in the email. “People are struggling to balance short-term needs with long-term goals, and for some, the pressure has become too much.”
Those who opted for early withdrawals risk retiring with far less than they need, Cox said, and many won’t be able to make up the difference.
“It is crucial to keep these investments locked in the retirement account, ensuring they are only accessible for retirement needs,” private wealth advisor Richard McWhorter told NTD News, sister media of The Epoch Times.
Those who don’t withdraw early will have greater savings for retirement for various reasons, according to Philip H. Weiss, principal of Phoenix-based AppriseWealth.com.
“They can more readily utilize tax planning strategies to withdraw funds from their retirement accounts when they retire, meaning it will cost them less to access their cash and they’ll have more time for their investments to grow and compound,” Weiss told The Epoch Times via email.
A 10 percent penalty is assessed for withdrawals prior to the age of 59 and six months, in addition to taxes owed on the sum.
“When early withdrawals come up in conversations with clients, it’s often around exploring early retirement options,” CustomFitFinancial.com owner and certified financial planner Chad Gammon told The Epoch Times. “More commonly, people use early withdrawals for financial hardship.”
Using data drawn from more than 1,000 qualified 401(k) and 403(b) plans and about 5 million participants for whom Vanguard directly provides recordkeeping services, the study also determined that the average participant account balance had increased significantly in just five years.
At the end of 2023, the average participant account balance was $134,128, compared with $106,478 for the same period in 2019.
“Participants increasing their savings is great news for retirement readiness,” Cope said.
At the end of 2024, 61 percent of Vanguard plans that permit employee-elective deferrals, or contributions, had adopted automatic enrollment.
The percentage of an employee’s earnings that is automatically contributed to their retirement savings if they fail to make their own election is known as default deferral.
“Higher default deferral rates help ensure people take greater advantage of matching employer contributions and help employees’ total savings rates inch closer to the 12-15 percent of total income (including employer match) that many experts recommend for a secure retirement,” Cope said.
The study further found that the use of professionally managed allocations and automatic options in retirement plans has improved the savings deferral rate for participants.
Some 45 percent increased their deferral rate in 2023, either on their own or as part of an automatic annual increase, compared with only 39 percent in 2022.
“The level of participant deferrals is a critical determinant of whether the plan will generate an adequate level of retirement savings,” Cope said.
Historically, employees in a 401(k) or 403(b) plan have had to make an active choice to join the plan, but the study found that the trend is shifting.
“Automatic enrollment overcomes several common deterrents to saving in an employer-sponsored retirement plan: lack of planning skills, complex decisions, inertia, and procrastination,” Cope added.
