High unemployment numbers and the looming threat of foreclosure are contributing factors to a record number of workers deciding to dip into their 401k retirement accounts, according to a report from Fidelity Investments.
Around 62,000 individuals initiated hardship withdrawals from 401k accounts in the second quarter amidst growing concerns about the weak U.S. economy and an increase in financial stress. This number is very telling of the economic climate, as only 45,000 or so made hardship withdrawals from 401ks during this period last year.
The troubling thing about many of these withdrawals is that the individuals making them are in their peak earning years, with the majority being between 35 and 55 years old. The lasting impact these withdrawals can have on retirement savings can be devastating for a lot of these workers since those younger than 59 ½ will have to pay a 10% penalty on top of the taxes they will pay.
Further cause for alarm is the fact that 45% of individuals who initiated a hardship withdrawal also did so one year prior. The number of people taking loans from their accounts also reached a 10-year high as loans initiated over the past 12 months grew to 11% of total active participants.
This risky financial trend points to a heightened sense of urgency as professionals are cracking open their once sacred nest egg to address today’s financial hardships. As a long-term financial strategy, borrowing against and withdrawing funds from one’s 401k is unwise to do. And despite the astonishing number of workers who are employing this risky strategy, across the board retirement account balances at the end of the second quarter were actually up 15% from the same time last year notes Fidelity.
The bottom line is that it’s never a good idea to tap into your retirement account early, since you pay harsh penalties and sap your savings for the years you may need them most. But this economic downturn has forced Americans to use everything they have just to stay afloat.
Not a heartening sign for consumer spending, or for the economy going forward.
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