According to a recent report, the number of workers who tapped into their 401(k) savings to cover financial emergencies has increased in the second quarter of 2023. In a rather unsurprising turn of events, roughly 15,950 employees took hardship distributions from their company-sponsored retirement accounts in the second quarter, representing a 12% increase from the previous quarter and a 36% increase from last year. The average amount withdrawn by participants in the second quarter was approximately $5,000, slightly lower than the first quarter’s average of $5,100 and the second quarter of 2022’s average of $5,400.
To add to the gloom, 2.5% of 401(k) participants decided to borrow from their workplace plan in the second quarter, up from 1.9% in the previous quarter. These participants borrowed an average of $8,550, which is similar to the loan size average in the first quarter but less than the $8,770 borrowed in the second quarter of 2021.
Lorna Sabbia, the head of retirement and personal wealth solutions at Bank of America, made a rather obvious statement, saying, “This year, more employees are understandably prioritizing short-term expenses over long-term saving.” She added, “However, it’s critical that employees continue to invest in life’s biggest expense – retirement.”
While it’s not surprising that workers may need to tap into their retirement savings during emergencies, it’s worth noting that they may qualify for a hardship withdrawal and avoid paying the 10% early distribution tax in certain circumstances. The IRS lists several situations that may qualify as an immediate and heavy financial need. Another option for accessing retirement savings without incurring the additional 10% penalty is to borrow from it. However, workers should remember that while they won’t be taxed 10% for early withdrawals made under these circumstances, the withdrawal is still considered part of their taxable income.
Inflation and rising costs are contributing factors to why workers feel the need to save more for a comfortable retirement. According to a Charles Schwab survey, workers believe they would need to save an average of $1.8 million for retirement, compared to $1.7 million last year. However, only 37% of workers think it’s very likely they’ll achieve this target, marking a 10% decrease from last year. Despite the less optimistic outlook, employee contributions to their 401(k) remained steady at 6.5% throughout the first half of 2023.
Brian Bender, the head of Schwab Workplace Financial Services, highlighted the impact of inflation on workers’ finances, stating, “When inflation persists for an extended period of time, workers are inevitably going to feel a deeper impact on their wallets.” He acknowledged that while many workers are trying to cut back on spending, some costs are unavoidable, and certain areas of their finances have taken a hit. However, Bender noted that retirement saving continues to be a priority for workers, as evidenced by their maintained 401(k) savings rates and investment management over the past year.
In conclusion, it seems that workers are increasingly relying on their retirement savings for immediate financial needs, a trend that has been exacerbated by inflation and rising costs. While it’s important for employees to prioritize short-term expenses, it’s equally important for them to continue investing in their retirement.
