More Americans dip into retirement savings as living costs rise

(NewsNation) — More Americans are dipping into their retirement savings as the cost of living continues to rise, according to three recent reports.

Research from Bank of America, Empower and Fidelity show a similar trend: More people are taking loans and so-called “hardship withdrawals” from their nest eggs.

It’s one sign consumers are having to scrape together funds to cover their financial needs.

“You’re getting close to among the worst options when you’re raiding your retirement savings,” said Mark Hamrick, senior economic analyst at Bankrate.

Fidelity, one of the nation’s largest 401k providers, found hardship distributions that are only available to those experiencing “an immediate and heavy financial need,” jumped over 25% from the third quarter of 2022 to 2023.

Empower, another major retirement plan provider, reported a 46% jump in hardship withdrawals over the past year. The average amount of each was right around $10,000. Bank of America has also observed an increase in 401k savers pulling out money for hardships recently.

Those distributions come with several drawbacks. Hardship withdrawals are subject to income taxes unless they consist of Roth contributions. They could also face a 10% early withdrawal tax, according to the IRS. And unlike loans, they don’t get paid back to the account.

“Once you take that money out you lose the savings but you also lose any ability to make more money off that in the future,” said NewsNation business contributor Gary Smith.

Smith said it’s typically better to make lifestyle adjustments to cut your expenses before leaning on retirement funds.

Savers aren’t just cracking the nest egg for hardships. Today more people are borrowing from their retirement accounts for any reason. Unlike hardship distributions, which are capped at the amount needed for the emergency, savers can take out loans as high as $50,000, depending on the plan.

Over the past year, Fidelity reported the proportion of people taking 401k loans jumped over 16%, citing “inflation” and “increasing cost of living” as potential explanations.

From 2022 to 2023, Empower recorded a 14% jump in new loans from workplace retirement plans, at an average of roughly $10,800.

More than a quarter of working Americans say they are very (10%) or somewhat likely (17%) to take a loan or hardship withdrawal in the next six months, according to Empower.

A recent Bankrate survey found 35% of people feel “significantly behind” on their retirement savings.

Hamrick says the turn toward retirement funds underscores a broader issue: Americans don’t have enough emergency savings to begin with.

That doesn’t mean tapping your 401k is always a bad idea or a “fatal mistake,” he said. In some cases, it may be better than taking on significant credit card debt at much higher interest rates.

With 401k loans, you don’t have to pay taxes and penalties like withdrawals. The interest you pay on the loan also goes back into your account.