The average American's 401(k) balance fell by 4% in the most recent fiscal quarter, primarily due to an increase in "hardship withdrawals" as individuals contend with the ongoing challenge of inflation.
The study highlights individuals' financial stress as they resort to tapping into their retirement savings to cover immediate expenses, as per New York Post.
Inflation and Market Volatility Hit Retirement Savings
A teller counts US dollars in a currency counter at a money exchange market in Nairobi on November 20, 2023.
According to Fidelity Investments, the typical 401(k) balance fell from $112,400 in the second quarter to $107,700 by the end of the latest three-month period on September 30, resulting in a nearly $5,000 drop. Similarly, Individual Retirement Account (IRA) balances declined, falling from $113,800 to $109,600 during the same period.
The study indicated that 2.3% of workers resorted to "hardship withdrawals," which the IRS defines as withdrawals for large, unexpected payments, marking an increase from 1.8% in the previous year. These withdrawals are subject to income tax, and individuals may face an additional 10% tax penalty if taken before the age of 59.5 or if they are not used for specified immediate financial needs.
One of the leading causes cited for the surge in hardship withdrawals was the impact of inflation, with eight in ten respondents identifying inflation as the reason for their financial stress. Fidelity Investments stressed the importance of helping retirement savers build emergency savings, as it emerged as the top savings goal among employees after retirement.
Market volatility and rising inflation have created a challenging environment for retirement savers this year, resulting in a decline in retirement account balances and increased loans and withdrawals. Fidelity Investments based its findings on data from its 45 million retirement accounts, which include 401(k) and 403(b) plans and IRA accounts.
The study also highlighted that retirement accounts have become a source of emergency funds for many Americans when faced with unexpected costs. It revealed that 2.3% of workers withdrew funds for hardship reasons, while 3.2% took in-service withdrawals with no hardship requirement, according to Market Watch.
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Emergency Withdrawals Surge as Americans Struggle
The most common reasons for these withdrawals were to avoid foreclosure or eviction and to cover medical expenses. Fidelity's study underscored the financial stress caused by inflation, with four out of five Americans reporting pressure due to rising costs and 57% unable to afford a $1,000 emergency expense.
Although the number of withdrawals and loans from retirement accounts has increased, Fidelity Investments emphasized that these still represent a relatively small percentage of plan participants overall. The report called for measures to help retirement savers secure access to emergency savings options.
Despite the challenges, Americans have continued contributing regularly to their retirement accounts. The report showed that savings rates in the third quarter remained steady and were slightly higher than the previous year. Notably, the report revealed that the total savings rate for the third quarter was 13.9%, with baby boomers saving at the highest levels at 16.7%.
While account balances experienced a dip in the third quarter, they have shown significant growth over the long term. The average IRA balance fell by 4% from the previous quarter but increased by 8% compared to last year and by 28% compared to a decade ago. Similarly, the average 401(k) balance dropped by 4% from the second quarter but increased by 11% year-over-year and by 27% compared to a decade ago.
Despite a slight drop in the number of millionaires with 401(k) accounts, Fidelity's report highlighted that Gen Z investors have been actively increasing their retirement savings, encouraging contributions from women in this age group. The data also revealed that Gen Z workers who have been in their 401(k) plans for five years reached an impressive balance of $29,100, Yahoo News reported.
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