The Blubber

An increasing number of Americans are making emergency "hardship withdrawals" from their 401(k) plans to avoid eviction or foreclosure, according to new data from investment and retirement giant Vanguard. This trend raises concerns about the looming retirement crisis and questions the robustness of the current "economic boom."

Vanguard reports that the number of hardship withdrawals per 1,000 savers soared about 40% last year and has doubled since 2021. The primary reason for these withdrawals is to prevent losing their homes. "In 2023, 39% of hardship withdrawals were used to avoid a home foreclosure or eviction, up from 31% two years earlier," Vanguard reveals.

What is most alarming is that these withdrawals are happening during a period of economic growth, where the unemployment rate has been below 4% for over two years. The rising demand for emergency cash to avoid eviction or foreclosure indicates that consumers are not just struggling with inflation but also with the increasing costs of housing and high interest rates.

Savers under 59 1/2 can access their 401(k) plans without paying a 10% early-withdrawal penalty only under certain legally defined circumstances, such as avoiding eviction or foreclosure, paying college tuition, or covering medical expenses.

Vanguard notes that one reason for the increase in these withdrawals is changes in the law in 2019 that made them easier to access. "Legislation in 2019 eased restrictions around hardship withdrawals, making it slightly easier for retirement plan participants to take them," says Jeff Clark, head of defined contribution research at Vanguard. Additionally, "automatic enrollment has increased year over year, bringing more workers, especially lower compensated workers, into retirement plans. As a result, the increase could reflect more Americans having access to a 401(k) balance to tap into during times of financial stress."

Clark added that despite the rise in hardship withdrawals, they still represent "relatively small numbers." Withdrawals totaled 72 for every 1,000 savers in 2023, averaging six per month. Fewer than 4% of savers took a hardship withdrawal during the year, according to Vanguard.