Millions of Americans are building larger retirement nest eggs than ever before. At the same time, a growing number are being forced to dip into those savings early.
New data shows that a record share of workers withdrew money from their 401(k) plans due to financial hardship last year, highlighting the uneven financial realities facing U.S. households.
For investors and policymakers, the trend reveals something important about the current economy. While stock markets and retirement balances are reaching historic highs, many Americans are still struggling with rising living costs, debt burdens, and unexpected emergencies.
Understanding why more workers are tapping retirement accounts early could provide insight into consumer health and future economic risks.
Hardship Withdrawals Hit a Record
According to retirement plan administrator Vanguard, about 6 percent of workers in its 401(k) plans took a hardship withdrawal in 2025, the highest level ever recorded.
That figure marks a significant increase from:
- 4.8 percent in 2024
- About 2 percent before the pandemic
The increase is part of a longer trend. Hardship withdrawals have risen every year since 2018, when federal law made it easier for workers to access retirement funds during emergencies.
Vanguard administers retirement plans for nearly five million workers, making its annual report one of the most closely watched indicators of retirement savings behavior.
While the percentage may seem small, it represents hundreds of thousands of workers pulling money out of retirement accounts early.
Why Workers Are Tapping Retirement Savings
The most common reasons Americans withdrew funds from their 401(k) accounts were basic financial emergencies.
According to Vanguard, the top reasons included:
- Avoiding foreclosure or eviction
- Paying medical bills
- Covering emergency living expenses
The median hardship withdrawal was about $1,900, suggesting most withdrawals are relatively small but urgent.
For many households, retirement savings have become a financial safety net of last resort.
Recent economic data helps explain why.
Americans have been facing several financial pressures at once:
- Elevated housing costs
- Higher interest rates on credit cards and loans
- Rising insurance and healthcare expenses
Even though unemployment remains historically low, many households are struggling with debt payments and cost of living increases.
Credit counseling organizations have also reported that the average income of people seeking financial help has been rising, indicating that even middle income households are feeling pressure.
Congress Made It Easier to Access Retirement Funds
Legislative changes have also contributed to the rise in hardship withdrawals.
In 2018, Congress eliminated a rule that required workers to take a 401(k) loan before requesting a hardship withdrawal.
That policy change removed a major barrier to accessing retirement savings.
More recently, the SECURE 2.0 Act, passed in 2022, expanded the list of circumstances that qualify for hardship withdrawals.
New provisions allow workers to withdraw funds for situations including:
- Domestic abuse emergencies
- Federally declared disasters
- Small emergency expenses
The law also introduced a new option allowing workers to withdraw up to $1,000 for an emergency once every three years without a penalty.
If the withdrawal is repaid, workers can regain access to the emergency option sooner.
These reforms were designed to give workers greater flexibility, but they also make it easier for retirement funds to be accessed before retirement.
Automatic Enrollment Is Expanding Access to Savings
Another major driver of hardship withdrawals is the rapid spread of automatic enrollment in workplace retirement plans.
Automatic enrollment places new employees into a company 401(k) plan unless they choose to opt out.
That change has dramatically increased the number of Americans with retirement savings accounts.
Among the roughly 1,300 employer retirement plans administered by Vanguard, about 61 percent automatically enrolled workers in 2025, compared with 34 percent in 2013.
The shift has been widely praised by retirement experts because it encourages workers to save.
But it also means that more Americans now have retirement balances they can tap during financial emergencies.
In other words, hardship withdrawals may be rising partly because more people now have retirement savings in the first place.
Retirement Savings Are Still Growing
Despite the increase in withdrawals, retirement savings overall are in strong shape.
Vanguard reports that average 401(k) account balances rose 13 percent in 2025, reaching a record $167,970.
Strong performance in both U.S. and international stock markets helped boost retirement accounts across the country.
At the same time, more workers are saving larger portions of their paychecks.
A record 45 percent of plan participants increased their savings rate in 2025, matching the record set the year before.
Many of those increases happened automatically through auto escalation programs, which gradually raise contribution rates each year.
Additionally, many companies are now starting workers at higher contribution levels.
In 2025, nearly one third of automatically enrolled retirement plans began workers at a savings rate of 6 percent or higher, almost three times the level seen in 2013.
David Stinnett, head of strategic retirement consulting at Vanguard, says the overall trend remains positive.
“People are saving more, remaining invested, and being automatically rebalanced in a professional way,” he said.
A Diverging Financial Reality
The data highlights an important reality about today’s U.S. economy.
Many Americans are financially stronger than ever.
At the same time, a meaningful portion of the population remains under financial strain.
Economists sometimes describe this as a “K-shaped economy.”
In this type of environment:
- Higher income households see wealth grow through investments and asset appreciation
- Lower income or financially stressed households struggle with rising costs and debt
This divergence has been especially visible since the pandemic.
Stock markets have surged over the past several years, helping boost retirement balances.
But inflation, housing costs, and borrowing expenses have also increased sharply.
As a result, some Americans have seen their wealth grow significantly while others have had to rely on savings to cover emergencies.
The Long Term Cost of Early Withdrawals
Financial advisors warn that even small withdrawals can have a large impact on retirement security.
When workers remove money from a retirement account early, they lose the benefits of long term compound growth.
For example, a $2,000 withdrawal today could potentially grow into tens of thousands of dollars over several decades if left invested.
Additionally, hardship withdrawals often come with tax consequences.
Workers who withdraw funds from traditional retirement accounts must pay ordinary income tax on the withdrawal.
Those under age 59½ may also face a 10 percent penalty, unless they qualify for one of the newer exceptions.
Because of these costs, most financial planners recommend treating retirement accounts as a last resort during financial emergencies.
What Investors Should Watch
For investors, rising hardship withdrawals may offer clues about the broader economy.
If withdrawals continue rising, it could signal increasing financial stress among consumers.
That would matter because consumer spending accounts for about 70 percent of U.S. economic activity.
Higher withdrawal rates could also hint at rising:
- Household debt problems
- Housing affordability challenges
- Healthcare cost pressures
At the same time, strong retirement savings growth and higher contribution rates suggest that many Americans remain financially resilient.
The result is a mixed picture.
Markets may be booming, but the financial reality for many households remains uneven.
Understanding that divergence could be key for investors trying to anticipate future economic trends.
Sources
https://corporate.vanguard.com/content/corporatesite/us/en/corp/articles/how-america-saves.html
https://www.congress.gov/bill/117th-congress/house-bill/2954
https://www.federalreserve.gov/publications/files/scf23.pdf
https://www.consumerfinance.gov/data-research/research-reports/making-ends-meet-in-2024
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