A growing number of people tapped into their retirement savings accounts last year amid the highest inflation in four decades.
A record number of those who hold Vanguard Group 401(k) accounts, 2.8%, tapped into those and pulled funds out last year, the Wall Street Journal reported on Thursday. That is well above the typical 2% rate before the pandemic and is up from 2.1% in 2021.
The decision to tap into retirement accounts was likely brought about by financial hardship last year and moves by the government that now make it a bit easier for account holders to withdraw the money.
Fiona Greig, global head of investor research and policy at Vanguard, said the high number of withdrawals is “evidence that some families may be feeling the pinch and drawing on their 401(k) balances to relieve that financial stress.”
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Last year was the worst year for inflation since the Great Inflation some 40 years ago. Inflation, as gauged by the consumer price index, peaked at a whopping 9.1% last June. While it has since declined to 6.5% in the 12 months ending in December, that is still more than three times the level the Federal Reserve prefers it to be running at.
Inflation-adjusted wages have been falling — meaning that workers have less purchasing power than a year ago. Median weekly real earnings have actually fallen by 3.4% since the start of 2021, according to data from the Bureau of Labor Statistics.
Undoubtedly contributing to the record number of people drawing from their 401(k)s early is that the Internal Revenue Service permits owners of the accounts to tap into them before they retire in cases of financial hardship. Acceptable reasons include covering medical bills, buying a primary home, preventing foreclosure or eviction, and more.
But pulling money early comes with a price. They must pay income taxes on the funds, and people under 59 1/2 often face a 10% penalty for drawing from the accounts early.
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While inflation has made life more unaffordable for consumers, there are some major bright spots in the economy. The biggest positive factor during 2022 was the red-hot labor market. Despite the Fed raising interest rates several times, unemployment remains low.
At 3.5%, the unemployment rate is tied for the lowest it has been since the 1950s, and monthly job growth averaged 375,000 in 2022, a very strong clip.
