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Saving for retirement is hard, and many Americans struggle.
According to a recent report from Vanguard, more employees are turning to their 401(k)s to pay for necessary expenses despite losing taxes. The percentage of 401(k) participants who cashed out has increased by about 1% since 2021, up from 6% last year. Designated “hardship withdrawals” can be financially devastating, as they take away important retirement savings, not to mention damaging the tax benefits of employer-sponsored retirement plans. This trend is something advisors need to understand to better prepare both current clients and the general public, said Fred Barstein, CEO of Retirement Advisor University.
“I don’t think there’s any real magic, like something happened,” he said. “The market went up, but it didn’t help you buy food, or pay your rent or your mortgage.”
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One reason Americans are withdrawing money from retirement funds is that federal regulations that prevent them from doing so have been relaxed, such as a law that was repealed in 2018 that required people to first take out a 401(k). But the primary factor is the rising cost of living, Barstein said, with the prices of necessities like housing and health care more expensive than ever. “I think it’s really just a function of rising costs, the cost of living: gas prices, food prices, a lot of things,” he said.
According to the Vanguard report:
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The most common hardship exit scenario is a worker earning less than $50,000 who cannot afford to pay their monthly household bills.
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Housing accounts for 40% of withdrawals for those making less than $50,000.
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Those in the highest income bracket, making $150,000 or more, have only 1% of hard withdrawals and are more likely to use that money to pay for education.
Barstein added that education can help in the near term. “Counselors should be more available, and they should be more educated,” he said. “What I’ll do is on-demand webinars. Make a 12-minute video saying, ‘Hey, if you’re having a problem and you’re thinking of doing it tough, I understand. Here are some other options.’
PLESA and thank you. One overlooked financial tool is the PLESA, or Pension-Linked Emergency Savings Account, Barstein said. PLESAs are temporary savings accounts that allow workers who don’t have a lot of income to make Roth, or after-tax, contributions. “It has to be funded first before people put money into a 401(k),” he said. “It’s kind of a side job, and when people are told to do it, and it’s part of the paycheck, and it comes out of the paycheck, they’re more likely than not to do it themselves.”
This post first appeared on Retirement. To gain actionable insight for financial advisors through strategies, products and policy changes that improve retirement outcomes, subscribe to our free Retirement Top Newsletter.
