Americans Are Drawing From Their 401(k)s to Cover Expenses
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Here's your Money Briefing for Friday, February 3rd. I'm J.R. Whalen for The Wall Street Journal. Much of the past year has been an uphill climb for some American consumers. With their savings nearly depleted and expenses eating a big chunk of their paycheck, many are turning to their 401k to help make ends meet.
In 2022, we saw pretty high inflation. And towards the end of the year, we saw some other signs of economic distress from consumers, including rising credit card balances.
The cash sitting in your 401k can be a saving grace, but what are the penalties from any early withdrawals? And what alternatives should you consider before taking money out? We'll talk to Wall Street Journal retirement reporter Anne Tergesen about that after the break.
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More Americans are tapping into their 401k and retirement funds for financial emergencies. What's causing them to draw funds that they might need in their later years? And what questions should they be asking before hitting the withdraw button? WSJ retirement reporter Anne Tergesen joins us with more.
Why are more Americans tapping their 401(k)s for everyday expenses?
Hey, Anne, thanks for being here.
Thanks for having me.
So, Anne, what are 401k plan providers telling you in terms of how many people are tapping into their retirement funds?
So Vanguard, which is a very large record keeper for 401k plans, they're telling me that hardship withdrawals, which people can take in certain situations that meet the definition of an economic hardship, that those hit a record level in 2022. Granted, it's only 2.8% of the 5 million people in 401k plans at Vanguard that took these, but that 2.8% actually represents a record level for Vanguard. And that's up from 2.1% in 2021.
So aside from withdrawals made during retirement, why do people typically tap into their 401k?
So in cases involving economic hardships, about half of the people who take them are typically trying to avoid either eviction or foreclosure. And another 15% are paying medical bills with another 10% paying college tuition. And that data is from another 401k record keeper.
So what's driving those percentages you mentioned, the percentages of people making withdrawals to these record numbers?
You know, Vanguard is citing a couple different factors behind the numbers. One we can get to later that involves Congress loosening restrictions on taking these withdrawals. Another one being that in 2022, we saw pretty high inflation. And towards the end of the year, we saw some other signs of economic distress from consumers, including rising credit card balances, probably also tied to high inflation. and declining savings rates so that there is some thought that this is likely an indication, another indication that consumers are under stress if they're taking early withdrawals from their retirement accounts. There's also been a wave of layoffs, especially in recent months, that may be causing people to take money out of their retirement accounts early.
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