Data shows that more defaulting Americans, feeling the strain of high prices and a lack of ability to save, have tapped their 401(k) accounts for financial emergencies.
The Internal Revenue Service allows Americans who are experiencing economic difficulties to withdraw some of their 401(k) money early — but figures show more people are using the service now than in previous years.
Before the pandemic, the average number of people diving into their Vanguard Group 401(k) account was 2 percent — about 100,000 of the investment firm’s five million clients.
This rose to 2.1 percent in 2021, which corresponds to about 105,000 people.
However, the latest figures from 2022 show that number has risen to 140,000 — that’s 2.8 percent of the total number of people using Vanguard’s 401(k) service.
Fiona Greig, Global Head of Investor Research and Policy at Vanguard. She said the new data shows Americans need to dive into the funds to ease their financial stress
Elsewhere, 217,661 people in the federal government’s austerity plan took advantage of hardship distributions in 2022. That number was almost half in 2021, 145,834.
Since 2018, government changes have meant that rules around taking funds out of retirement accounts have become more lenient, which experts say has fueled the change.
But the personal and financial woes of bankrupt Americans are one of the main reasons more and more people are diving into their retirement plans.
Mass layoffs across the country in a number of sectors, a lack of adequate savings and the US teetering on the brink of recession have left many people in desperate times.
Fiona Greig, Vanguard’s global head of investor research and policy, told WSJ that the payouts are “a testament that some families are sensing the need and are turning to their 401(k) balances to relieve that financial stress.”
“Economic hardship” can mean preventing foreclosures and evictions, covering medical bills, paying funerals and college tuition, buying a primary residence, and covering repair costs.
Rob Austin, director of research at Alight Solutions LLC, said the trends are mostly being driven by people avoiding evictions
Rob Austin, director of research at Alight Solutions LLC, argued that most people dip into their funds to avoid eviction. About 15 percent do this to pay for medical bills and 10 percent to pay for college tuition.
But the trend could also be caused by more lower-paid workers being automatically pulled into 401(k) accounts by their employers — where they might instead choose to have cash come straight to them in the first place.
Significantly, the figures show that as of December 2022, Americans saved an average of 3.4 percent of their monthly income. But a year earlier, in 2021, that saving was 7.5 percent.
However, people are only allowed to withdraw the money they need in hardship cases, while continuing to pay income tax on withdrawals from traditional accounts.
If people are under the age of 59.5, there is usually a 10 percent penalty on the payout as well.
Last month, the White House accused Republicans of using the economy as a hostage to the debt ceiling to impose drastic spending cuts that would hurt ordinary Americans.
The US was about to hit the debt ceiling, and Congress was now tasked with staving off a catastrophic default that could hit in June.
But that will require an agreement to raise the $31 trillion debt ceiling, something die-hard Republicans will only agree to when it comes to spending cuts and changes in President Joe Biden’s policies.
“They threaten to destroy millions of jobs and 401,000 plans by trying to hold the debt ceiling hostage unless they can cut Social Security, cut Medicare, cut Medicaid,” press secretary Karine Jean-Pierre said during her regular briefings
“On that last point, the President made it clear that he will not allow Republicans to hold the economy hostage or make working Americans pay the price for their schemes to benefit the wealthiest Americans as well as special interests.”