401(k) Accounts Are BEing Tapped Out Of Financial Strain, Democrat Policy Causing Increasing Hardship All Over America
In a clear indication of a struggling economy, an increasing number of Americans are dipping into their 401(k) retirement accounts to meet basic living expenses, according to data released by Fidelity Investments on Monday.
Bloomberg’s Alexandre Tanzi points out that Americans outside the wealthiest quintile have exhausted the extra savings they generated early in the pandemic and now find themselves with less cash on hand than they had when the pandemic began, as per Federal Reserve data.
Paul Krugman: “What’s really odd is that people don’t behave as if it’s a terrible economy.”
401K HARDSHIP WITHDRAWAL RATE
— Hedgeye (@Hedgeye) November 21, 2023
According to Fidelity, 2.3% of individuals took a hardship withdrawal in the third quarter, a notable increase from the 1.8% observed in the same quarter of 2022. The primary reasons cited for these third-quarter withdrawals were to avoid foreclosure/eviction and cover medical expenses.
However, withdrawals aren’t the sole means by which individuals are tapping into their 401(k) savings. Fidelity reports that 2.8% took loans from their retirement balances, up from 2.4% last year. What’s even more concerning is that a significant 17.6% of workers currently have an outstanding loan against their 401(k).
These withdrawals and loans not only signify an increasingly troubled economy but also foreshadow a financially weaker future for the growing number of individuals resorting to these measures.
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The hardship withdrawal rate is expected to continue rising, and a new rule set to take effect in 2024 may contribute to this trend. The rule will allow withdrawals of up to $1,000 for emergencies without incurring the 10% penalty for those under 59 1/2. Participants will have the option to repay these sub-$1,000 withdrawals back into their accounts over three years. While this rule may be introduced with empathetic intentions, some argue that it could inadvertently encourage financially destructive behavior.
And the number making 401k hardship withdrawals is on the rise.
If the jobs you are “creating ” are mostly government or part time and the spending supporting the economy is on credit and retirement saving you ain’t getting the job done. – Forbes Mag article linked
Current IRS rules permit hardship withdrawals for “an immediate and heavy financial need.” Unless the withdrawal is from a Roth account, it is subject to taxation, including a potential 10% penalty for those under the age of 59 1/2.
401(k) loans may seem less detrimental, but they come with their own set of disadvantages. For instance, the interest paid on these loans, labeled as paying “to yourself,” is derived from money that has already been taxed. When withdrawn in retirement, this amount is subject to taxation again. Additionally, failure to repay loans on time or before changing jobs results in the loans being re-characterized as distributions, subjecting individuals to income taxes and the 10% penalty.
401k/IRA hardship distributions are trending up pic.twitter.com/KXZcsaB0ar
— Piker Capital (@PikerCap) November 13, 2023
The key to avoiding the necessity of tapping into retirement savings begins with building an emergency fund. Financial planners typically advise having the equivalent of three to six months’ worth of living expenses in a liquid account, such as a money market mutual fund. However, a January Bankrate survey revealed that 57% of American adults are unable to cover a $1,000 emergency expense. This percentage has likely increased over the past 10 months. Continued below the Goldco ad
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In a separate survey conducted by Fidelity, 8 out of 10 workers expressed stress over inflation and the rising cost of living, with half admitting that it is enough to distract them on the job. As financial pressures continue to mount, it becomes increasingly crucial for individuals to explore sustainable solutions and strengthen their financial resilience to weather unforeseen challenges without compromising their retirement savings.
Major Points Discussed:
- More Americans tapping into 401(k) accounts: Fidelity data reveals a growing trend of individuals using their retirement savings to cover basic living costs amid economic challenges.
- Increase in hardship withdrawals: The rate of hardship withdrawals rose from 1.8% in Q3 2022 to 2.3% in the same quarter of 2023, with top reasons being foreclosure/eviction avoidance and medical expenses.
- Rise in 401(k) loans: Fidelity reports a jump from 2.4% to 2.8% in individuals taking loans from their retirement balances, and a concerning 17.6% of workers currently have outstanding loans against their 401(k).
- Anticipated continued increase in withdrawals: Forecasts suggest that the hardship withdrawal rate will continue to climb, possibly exacerbated by a new rule in 2024 allowing penalty-free withdrawals up to $1,000 for emergencies.
- Financial challenges and stress: Surveys indicate that inflation and the cost of living are causing significant stress for 8 out of 10 workers, with half admitting it’s impacting their job performance, emphasizing the need for improved financial resilience and emergency funds.
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Comments – Threads – Links
- Right now the sheep are buying and dont realize the yield curve will soon UN invert, which is going to tear the economy, 401k and the stockmarket a new one. The Federal reserve are broke. Rn, The sheep continue to think this will NOT happen, which is why they are screwed. Tweet
- The cool thing is, as inflation gets worse more people will hardship withdraw just to stay above water and others will stop contributing to 401k altogether. The ponzi is gonna slowly lose its passive flow. ROF