4 Reasons People Are Using 401(k)s for Emergencies, According to Vanguard
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So why are more Americans raiding their retirement accounts? The report listed the following reasons for hardship withdrawals.
Over a third (35%) of account holders who took a hardship withdrawal listed avoiding foreclosure or eviction as their motivation.
'Traditionally, homeowners in financial distress might refinance or tap home equity to stay afloat,' said Josh Richner of FaithWorks Financial. 'But with mortgage rates hovering near 7%, refinance volume has dropped to its lowest level since the mid-1990s. That leaves many turning to the only sizable resource they can access: their retirement savings.'
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At 30%, medical expenses made up the second most common driver of hardship withdrawals last year.
It doesn't help that many Americans have little to no emergency savings. A study by GOBankingRates found that half of Americans have $500 or less in savings.
Vanguard reported that 16% of hardship withdrawals went to cover a home repair or purchase.
Brett Daniel, founder of Daniel Safe Money Retirement Solutions, cautioned homebuyers against raiding their retirement savings. 'While purchasing a home can make a great financial investment, using retirement savings for the down payment or home repairs is risky due to the fees involved on the amount withdrawn from your 401(k).'
It also leaves you with less money in financial investments to compound throughout your career and pay for your retirement.
Another 14% of hardship withdrawals went to covering tuition costs, and 5% were uncategorized.
While some of those withdrawals helped the account holders themselves get degrees and improve their future earnings, some likely went to account holders' children. But most financial experts agree that's a dangerous path, as children have many options to fund their college degree, but retirees have just one: their savings.
'Parents looking to help with tuition should look at 529 college savings plans or Coverdell Education Savings Accounts, rather than draining their own retirement accounts,' Daniel said.
Vanguard noted that it is now easier to request a hardship withdrawal, due to a 2019 budget act, which could account for some of the increase.
Additionally, another recent law could also help explain the bump in hardship withdrawals from 401(k)s. The Secure 2.0 Act of 2022 required employers to automatically enroll new workers in 401(k) accounts, if available. That led to many lower-income workers having retirement accounts, and for some, it represents their only source of savings.
Overall, Vanguard doesn't see much cause for alarm with the heightened hardship withdrawals. The report pointed to these legal changes as significant drivers, taking a sanguine stance on the 4.8% hardship withdrawal rate.
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This article originally appeared on GOBankingRates.com: 4 Reasons People Are Using 401(k)s for Emergencies, According to Vanguard
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