Now working in the public sector and paying into a pension, Mr. Scharf, 55, calculates that if he retires at 70, he can draw 40 percent of his former salary. As much as his retirement accounts have functioned as circuit breakers to reset his debts, he’s relieved that he doesn’t have the option of withdrawing his pension contributions.
“I don’t want to have to do that anymore, so I’m forcing myself not to,” he said.
Mr. Scharf has plenty of company, especially recently. Two large retirement plan administrators, Fidelity and Vanguard, have observed increases in hardship withdrawals, which may be taken only if there is “an immediate and heavy financial need,” according to the Internal Revenue Service. Fidelity found that 2.4 percent of 22 million people with retirement accounts in its system took hardship withdrawals in the final quarter of 2022, up half a percentage point from a year earlier. A similar analysis by Vanguard found that 2.8 percent of five million people with retirement accounts made a hardship withdrawal last year, up from 2.1 percent a year earlier.
In the first three months of 2023, Bank of America found that the number of people taking hardship withdrawals jumped 33 percent from the same period a year earlier, with workers taking out an average of $5,100 each.
“Customers are much more aware that their retirement accounts are not sacrosanct,” said Steve Parrish, adjunct professor and co-director of the Center for Retirement Income at the American College of Financial Services. “The trend has already started. People are realizing their 401(k)s aren’t locked until they’re 60.”
Some experts warn that this could be just the tip of the iceberg, pointing to the many American families struggling with higher costs. Although the personal savings rate hit a high of nearly 34 percent in April 2020 because of Covid lockdowns and stimulus payments, it has since fallen to about 5 percent, according to the U.S. Bureau of Economic Analysis.