While Americans appear to be wealthier on paper, they’re more financially fragile in reality, according to data from retirement investment firms.
Americans finished 2025 with more money in their retirement accounts than at any point in history, according to a report from Vanguard. However, for the sixth straight year, more of them also raided their retirement accounts during a crisis.
A 401(k) hardship withdrawal is different from a 401(k) loan, which must be paid back, but there are still consequences, according to the IRS. Hardship withdrawals may incur up to a 10% penalty (waived at age 59½) and are subject to income tax. Plus, you won’t be earning interest on that chunk of money, and you may not be able to contribute to your account for six months after you receive the funds.
The trend signals that while some Americans were doing well enough to build larger retirement portfolios, a growing number were also struggling with day-to-day financial pressures and needed to access retirement savings to cover emergencies.
For working adults in their late 50s and early 60s, the trend may be especially concerning. While younger workers often have decades to replenish retirement savings, those nearing retirement have fewer working years remaining to replace money withdrawn from tax-advantaged accounts. Even a relatively modest withdrawal can reduce future income and investment growth at a time when retirement is approaching.
Vanguard’s 2026 report on Americans’ savings habits found that 6% of participants in its 401(k) plans took a hardship withdrawal in 2025, up from 4.8% in 2024 and triple the roughly 2% annual rate recorded before the pandemic. It marks the sixth consecutive annual increase in the rate of hardship withdrawals since Congress loosened the rules in 2018 by eliminating the requirement to take out a 401(k) loan before making a withdrawal.
But, according to the report, the increase isn’t surprising, “given that it’s now easier to request a hardship withdrawal and that automatic enrollment is helping more workers save for retirement, especially lower-income workers… And for a small subset of workers facing financial stress, hardship withdrawals may serve as a safety net that may not otherwise have been available without plan-implemented automatic solutions.”
Hardship withdrawals, which can be taken in cases of “immediate and heavy financial need,” include emergencies like unexpected medical bills, avoiding eviction or foreclosure, funeral costs or disaster-related expenses.
The IRS outlines the terms of retirement plan hardships, early withdrawals and loans, including tax penalties and definitions of what constitutes immediate or heavy need.
Why Hardship Withdrawals are Climbing
The increase in hardship withdrawals has several drivers.
Policy changes
In the Bipartisan Budget Act of 2018, Congress relaxed strict 401(k) and 403(b) hardship withdrawal rules, eliminating the mandatory requirement that participants take loans from their retirement plans before qualifying for a hardship withdrawal, and ending the rule that suspended employee contributions for six months following a hardship distribution.
Automatic enrollment expansion
In 1998, the IRS ruled that employers could automatically enroll workers in a company plan. Instead of opting in, workers would have the option to opt out. The Pension Protection Act of 2006 gave companies legal protections to enroll employees by default into retirement savings plans.
“Automatic enrollment in employer-sponsored 401(k) savings plans has transformed the way that millions of Americans save for retirement,” said Joshua Dietch, head of T. Rowe Price Retirement Thought Leadership, and Dr. Taha Choukhmane, MIT Sloan School of Management Associate Professor of Finance, in their report “Automatic Enrollment’s Long-Term Effect on Retirement Saving.”
Cost-of-living pressure
The cost of almost everything — from housing to groceries to gas to healthcare — has gone up significantly in the last several years. According to the U.S. Bureau of Labor Statistics, inflation rose sharply in 2021 and 2022 and has remained elevated compared to pre-pandemic levels. The Consumer Price Index, the Federal Reserve’s main measure of cost-of-living changes, peaked at about 6.5% in 2022, the highest in 40 years. And, even though inflation rates have come down from their pandemic-era peak, prices did not fall and price levels appear to be permanent, according to the Federal Reserve.
Lack of emergency savings
Vanguard found that fewer than half of its investors had more than $2,000 saved in an emergency fund. According to the Federal Reserve’s 2025 Survey of Household Economics and Decisionmaking, only 55% of American adults had savings to cover three months of expenses. The Fed also found that 18% of adults had less than $100 in savings and 29% had less than $1,000.
“The high cost of living — with escalated price tags on everything from groceries to housing to healthcare — is hurting people’s everyday lives and forcing them to raid their retirement savings, which only inflicts even more financial pain later,” wrote MarketWatch in 2025.
A separate report by Fidelity Investments found a similar pattern, with retirement account balances up but hardship withdrawals also on the rise.
Fidelity found that 401(k) retirement account balances were up by over 10% and 403(b) balances were up by 13%. IRAs grew by 7%. Fidelity credits stock market performance and increased use of automatic enrollment, with auto-enrollment at 44.9% at the end of 2025 — up from 36.5% at the end of 2020 — according to its report.
Fidelity also found that hardship withdrawals increased from 2% in 2018 to 5% in 2024. And, it said, more participants were also taking out loans from their 401(k)s. In 2025, 19.4% of participants had an outstanding loan, an increase from 18.9% in 2024.
“I’m not surprised given the cost of living we’ve seen increase in the past five years,” Kirsten Hunter-Peterson, vice president of workplace thought leadership at Fidelity Investments, told MarketWatch. “Emergencies are always happening. Life has just gotten more expensive. Everything is just costing a higher amount, and people are needing to take a withdrawal because many people don’t have emergency savings. The problem is that, by the time you retire, you’ve hamstrung your growth.”
According to its 2026 Global Financial Wellness Report, Fidelity noted that the cost of living and impact of inflation are the top stressors for more than 6 in 10 workers (64%), followed by the state of the economy (60%) and global political events (53%).
Older Americans Leading the Way
The Plan Sponsor Council of America, a national nonprofit trade association, found in its 68th Annual 401(k) Survey from 2024 that employee savings rates were skewed in favor of older generations — with boomers contributing an average of 12.1% of pay, compared with 10.4% for Gen X, 8.9% for Millennials and 7.5% for Gen Z. The pattern reflects both higher earnings among older workers and greater financial pressures — such as debt and housing costs — on younger generations.
Top image source: monthirayodtiwong, via Canva.com
