The share of workers robbing their future selves remains at an all-time high.
Thirty-seven percent of workers have taken a loan, early withdrawal, and/or hardship withdrawal from their 401(k) or similar plan or IRA, according to a survey released Thursday by the nonprofit Transamerica Center for Retirement Studies (TCRS) in collaboration with the Transamerica Institute. That matches 2022’s level, which is also the highest level in the history of the survey.
Those withdrawals underscore why many workers have a pessimistic outlook for their retirement as they grapple with a lack of emergency funds and stretched household budgets that have forced them to tap their nest eggs. The practice could become even more prevalent as new rules make it easier to do so.
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“I am deeply concerned about the fragility of retirement security for so many workers,” Catherine Collinson, CEO and president of Transamerica Institute and TCRS, told Yahoo Finance.
“The pandemic and last year’s turbulent economy with high inflation and falling stock markets took a toll on workers’ employment, finances, and retirement preparations. Without extra support from policymakers and employers, it will be extremely tough for many workers to recover.”
Needing the money now
The survey — which polled 5,725 workers at a for-profit company between November 8 and December 13, 2022 — found 30% took a loan and 21% took an early and/or hardship withdrawal.
Generation Z is somewhat more likely than millennials, Generation X, and Baby Boomers to have taken an early and/or hardship withdrawal (28%, 24%, 19%, and 12%, respectively).
The overall findings echo other surveys on retirement account blitzes.
For instance, in 2022, 2.8% of 401(k) plan participants took a hardship withdrawal, a record high, up from 2.1% in 2021 and 1.9% in 2018, according to a recent Vanguard report.
And in the first three months of 2023, the number of plan participants taking hardship withdrawals jumped 33% from the same period a year earlier, with workers taking out an average of $5,100 each, according to a Bank of America report.
The biggest roadblock for the majority (53%) of workers to retirement savings is crystal clear — debt, the Transamerica survey found. There is, however, a sharp split across generations. Millennials, Gen X, and Gen Z are more likely to say that’s the issue than baby boomers (58%, 56%, 54%, and 34%, respectively).
“Lack of savings are hurting everyone–whether you're Gen Z entering the workforce saddled with student loans or Gen X supporting both kids and parents,” Sid Pailla, chief executive of the Sunny Day Fund, a financial technology company that helps workers establish emergency funds.
“So when a financial emergency inevitably hits, our research shows that one in five people are sacrificing their retirement security by taking 401(k) early withdrawals or loans.”
Other reasons for hardship withdrawals: paying for certain medical expenses (17%), payments to prevent eviction from one’s principal residence (16%), expenses and losses incurred due to a disaster in a federally declared disaster area (15%), payment of tuition and related educational fees (14%), cover costs related to purchase of a principal residence (13%), expenses for qualified repairs to damage of principal residence (12%), and burial or funeral expenses (6%).
“With inflation, economic disruption, and the continuing wealth gap, some of the working population simply needs to access their money now,” Steve Parrish, adjunct professor and co-director of the Center for Retirement Income at the American College of Financial Services, told Yahoo Finance. “That includes tapping their retirement accounts.”
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Pervasive pessimism
Of course, those withdrawals have long-term consequences, which may be one reason why so many workers are worried.
Four in ten (41%) of workers think that future generations of retirees will be worse off than those currently in retirement, according to the Transamerica survey.
Their greatest retirement fears: outliving their savings and investments (39%), Social Security will be reduced or cease to exist (36%), declining health that requires long-term care (35%), not being able to meet the needs of their family (32%), and possible long-term care costs (31%), the survey found.
Baby boomers and Generation X are more likely than millennials and Generation Z to fear outliving their savings and investments – 49%, 42%, 36%, and 32%, respectively, according to the findings.
Lurking behind that palpable fear of outliving their money is the stark reality that almost 6 in 10 Generation Z workers (57%) say they’re having trouble making ends meet. Almost half (48%) of millennial workers have trouble making ends meet, along with 42% of Gen Xers and about a quarter (23%) of boomers.
Most workers (53%) say they simply don’t have enough income to save for retirement, according to the researchers.
More withdrawals to come?
Experts are worried that a change in the law could lead more workers to raid those savings meant for their golden years.
The SECURE 2.0 Act that passed at the end of 2022 created six new ways to access retirement accounts penalty-free before age 59 ½, according to Parrish. The goal was to motivate workers to contribute more by making it easier to tap those funds if needed without penalty.
“If workers know they can get at their money if needed before retirement, the hoped-for behavior is they will contribute more out of each paycheck to these accounts. I fear the public will take Congress up on these liberalized provisions, and go in and out of their retirement plans. The current increase in withdrawals and loans may be an indicator of movements to come,” Parrish said.
“My concern is that people are starting to see these accounts as savings rather than retirement accounts.”
Kerry Hannon is a Senior Reporter and Columnist at Yahoo Finance. She is a workplace futurist, a career and retirement strategist and the author of 14 books, including "In Control at 50+: How to Succeed in The New World of Work" and "Never Too Old To Get Rich." Follow her on Twitter @kerryhannon.
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