Why More Americans Are Dipping Into Retirement Savings for Emergencies
More Americans are increasingly relying on their 401(k) accounts to cover short-term financial needs, signaling growing vulnerability to economic shocks. Recent research from Vanguard Group and the FINRA Investor Education Foundation shows a record rise in hardship withdrawals and cash-outs, especially among hourly workers and those with unpredictable income.
According to Vanguard, 4.8% of workers in 401(k) plans took a hardship withdrawal in 2024—more than double the pre-pandemic average of 2%. Nearly one in three workers who leave a job now liquidate their 401(k), often paying taxes and penalties, rather than keeping the money invested for retirement. With $12.2 trillion held in U.S. 401(k) plans, many accounts are serving as both retirement savings and emergency lifelines.
The strain on retirement funds mirrors a decline in traditional emergency savings. A FINRA Foundation survey released in July 2025 found that only 46% of U.S. adults have enough savings to cover three months of expenses, down six percentage points from 2021. Higher-income households remain far more likely to maintain emergency funds than lower-income families, deepening financial divides.
“After more than a decade of improvements, we’re seeing many households – particularly in middle-income brackets – struggling financially despite stable incomes,” said Gerri Walsh, president of the FINRA Foundation.
Recent laws have also made accessing retirement funds easier. Legislation passed in 2018 and 2022 expanded hardship withdrawal eligibility to include medical bills, home purchases, terminal illness, domestic abuse, and federally declared disasters. A newer provision allows penalty-free withdrawals of up to $1,000 for emergencies every three years, with the option to replenish. Employers may also auto-enroll workers earning under $160,000 into emergency savings accounts within Roth 401(k)s, allowing up to $2,500 to be saved and withdrawn tax- and penalty-free.
Still, the financial stress is clear. FINRA’s research found that 25% of adults reported an unexpected income decline in the past year, while 36% experienced frequent swings in monthly income. Vanguard’s data show hourly workers are hit hardest—42% of hourly employees earning $50,000 to $75,000 cashed out their 401(k) after leaving a job, compared with 28% of salaried workers at similar income levels.
“For many workers, getting through today or this month is the more immediate concern,” said Timothy Flacke, CEO of Commonwealth, a nonprofit helping low-income workers save, in comments to the Wall Street Journal.
Sources: Vanguard Group, FINRA Investor Education Foundation, Wall Street Journal