The latest financial quarter has seen a significant decline in the average American’s 401(k) balance, with a 4% drop attributed to the rise in “hardship withdrawals” as individuals grapple with the persistent challenges of inflation, according to a study released by Fidelity Investments.
The study, based on data from more than 45 million retirement accounts, found that the typical 401(k) balance fell from $112,400 in the second quarter to $107,700 in the period ending on September 30th, marking a substantial decrease of nearly $5,000. Individual Retirement Account (IRA) balances also experienced a similar downturn, declining from $113,800 to $109,600 during the same time frame.
One of the most concerning trends revealed in the report is the increase in “hardship withdrawals,” defined by the IRS as withdrawals for significant, unexpected expenses. Fidelity reported that 2.3% of workers resorted to hardship withdrawals in the third quarter, up from 1.8% in the same period the previous year.
These withdrawals are subject to income tax, with an additional potential 10% tax penalty if taken before the age of 59.5 or for purposes other than specific immediate financial needs such as medical bills, school tuition, or home repairs.
The primary driver behind these withdrawals, as reported by eight in 10 respondents, is the ongoing inflation issue, which has put significant financial stress on Americans. Fidelity’s report emphasized the importance of emergency savings, which has been identified as the top savings goal among employees following retirement.
According to Fidelity’s findings, the main reasons for hardship withdrawals were to avoid eviction and cover medical expenses, reflecting the dire financial circumstances faced by some account holders.
Additionally, in-service withdrawals, not categorized as “hardships” and thus subject to tax and penalty payments, also increased in the third quarter, rising to 3.2% from 2.7% in the previous year. Borrowing against 401(k) accounts also saw an uptick, reaching 2.8% in the latest quarter, up from 2.4% in the second quarter of 2022.
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401(k) Decline and Rising Loans Reflect Financial Challenges
Outstanding loans on retirement plans, capped at $50,000 or 50% of the account holder’s assets, saw a subtle increase from 17.2% in the previous year’s third quarter to 17.6% this year. This figure represents a significant departure from the all-time low of 16.6% observed in early 2022.
Borrowers who take loans from their retirement accounts are typically required to repay them within five years, with payments made at least quarterly.
Both 401(k)s and IRAs are retirement accounts, with the former offered by employers and the latter opened by individuals through banks or brokers. Regardless of the type of retirement account, withdrawals are generally only intended at 59.5, though the official retirement age in the United States is typically considered to be 67.
Fidelity’s report further highlighted many Americans’ financial challenges, with 57% of adults stating that they could not afford a $1,000 emergency expense.
These difficulties are exacerbated by persistent inflation, as October’s Consumer Price Index rose 3.2% compared to the previous year, following a 3.7% increase in September. Prices have surged by a staggering 18.2% compared to October 2020, when a COVID-induced lockdown impacted the United States.
Meanwhile, the Biden administration’s economic agenda, often touted as a means to reduce the government’s deficit, has come under scrutiny in light of recently released Treasury data, which shows the debt doubling from approximately $1 trillion to $2 trillion over the past year.
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