A recent report from Bank of America (BofA) has unveiled a concerning trend in the financial landscape as the number of workers tapping into their 401(k) savings to address immediate financial emergencies surged during the second quarter of 2023. This development underscores the challenges individuals face in managing their finances and planning for the future.
According to the report, approximately 15,950 employees resorted to hardship distributions from their company-sponsored retirement accounts in the second quarter. This marks a significant 12% increase from the preceding quarter and a substantial 36% rise compared to the same period in the previous year.
In terms of the average withdrawal amount, participants accessed approximately $5,000 in the second quarter. Although this is slightly lower than the averages of both the first quarter ($5,100) and the second quarter of the previous year ($5,400), it signifies the consistent need for immediate financial relief among participants.
Furthermore, the report revealed that 2.5% of 401(k) participants opted to borrow from their workplace plans in the second quarter, a notable increase from the 1.9% observed in the previous quarter. The average loan per participant amounted to $8,550, aligning with the first-quarter average but falling short of the $8,770 borrowed during the second quarter of 2021.
Lorna Sabbia, the head of retirement and personal wealth solutions at BofA, commented on the findings, stating, “This year, more employees are understandably prioritizing short-term expenses over long-term saving. However, it’s critical that employees continue to invest in life’s biggest expense – retirement.”
The ability to access retirement savings before the standard withdrawal age of 59 ½ is generally limited, but certain emergency situations may warrant a hardship withdrawal, allowing individuals to avoid the 10% early distribution tax.
The Internal Revenue Service (IRS) lists specific circumstances that may qualify as an immediate and heavy financial need, providing a legal pathway for individuals facing financial hardships to tap into their retirement savings.
Another option for accessing retirement savings without incurring the 10% penalty is to borrow from the 401(k) account, thus bypassing income taxes and early withdrawal penalties. However, it’s crucial to understand that while this approach avoids the additional tax, the withdrawn amount is still considered part of an individual’s taxable income.
Inflation and escalating living costs have played a pivotal role in prompting workers to reevaluate their retirement savings. A survey conducted by Charles Schwab found that workers believe they would need an average of $1.8 million for retirement, an increase from the $1.7 million estimated the previous year. Alarmingly, only 37% of workers feel very confident about achieving this financial goal, marking a 10% drop from the previous year.
Despite these financial challenges, employee contributions to their 401(k) accounts remained steady at 6.5% throughout the first half of 2023, as reported by BofA data. Brian Bender, the head of Schwab Workplace Financial Services, remarked, “When inflation persists for an extended period of time, workers are inevitably going to feel a deeper impact on their wallets.”
Nevertheless, workers continue to prioritize retirement savings, maintaining their 401(k) contribution rates and staying vigilant in managing their investments, despite the economic hurdles they face. For those nearing retirement or already retired, exploring options such as personal loans to reduce interest rates and monthly expenses could provide much-needed financial relief and security.
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