Retirement may look very different in a decade as Americans struggle to keep up with saving for their post-work years — if they have been able to at all. According to a recent GOBankingRates report, citing data from the U.S. Census Bureau, half of those nearing retirement age have no money set aside.
The report found that 50% of women and 47% of men aged 55 to 66 have nothing in their 401(k)s or IRAs. And of the ones that did have retirement savings, it appeared the amounts are now dwindling as costs of living and inflation have forced many to take out hardship loans from their 401(k)s, according to Vanguard’s “How America Saves 2023” report.
Per Fox Business, citing the report, retirement plan balances overall decreased by 20% over 2022 as 3% of workers reported taking a “hardship withdrawal” last year. That statistic increased from 2.1% in 2021 with many citing financial emergencies for the transaction.
According to The New York Times, hardship withdrawals are a legal option to take funds out of one’s elective deferral account in the case of “immediate and heavy financial need.” The IRS defines this need as situations requiring funds necessary for paying medical bills, college tuition, rent or mortgage payments when eviction or foreclosure is pending, funeral expenses, emergency home repairs and even new home down payments.
Though, if you’re under the age of 59 ½, there are usually penalties involved. Said penalties range up to 10% of the money borrowed, as well as the funding being subject to regular income taxes. That generally means workers need to take out more than they might need in order to cover the added expenses, permanently reducing the amount they have saved (since the money can’t be paid back into the account).
This is why many advisors — like Joni Alt with Evermay Wealth Management — suggest it only as a “last resort.” She told The New York Times she recommends looking into other options first, like taking out a home equity line of credit, in order to leave retirement funding untapped. Another option is to take out a loan against a 401(k), which can be paid back over time and is not subject to penalties since the money is just being borrowed. Though this borrowing angle comes with risks, too, especially if your workplace requires you to pay it back quickly if you change jobs.
Retirement has become a hot topic in recent years, with even the government taking action. The Biden administration passed the SECURE 2.0 Act in December 2022, a piece of legislation that aims to make saving easier for millions of Americans. New measures will be rolled out over the next decade, including automatic enrollment into an employer’s 401(k) plan, “catchup contribution” opportunities for older workers and employers contributing to your savings on your behalf as you pay off student loans.