Strapped For Cash, More Workers Are Dipping Into Retirement Savings

U.S. workers are increasingly tapping into their retirement savings ahead of schedule, with Millennials and Generation Z the most likely to make the undesirable move to cover a financial emergency, pay off debt or manage everyday expenses.

Last year 37% of workers surveyed by the Transamerica Center for Retirement Studies said they had dipped into their 401(k), individual retirement account or similar plan at some point in their lives, either by borrowing or making an early or hardship withdrawal. In 2018, 29% answered the same way, and the share continued to grow as the pandemic unfolded, reaching 37% in 2021 and staying at that level in 2022. 

In the latest annual survey, younger workers were the most likely to have drawn on their accounts, with Millennials the most common borrowers and Gen Zers the most typical withdrawers.

“Today’s workers are navigating the extended hangover of the pandemic as well as new disruptions that pose a threat to their lifestyles and livelihoods,” the center wrote in a recent report accompanying the latest results. “A concerning percentage of workers are tapping into their retirement savings before they retire,” a move that can "severely inhibit” the long-term growth of those accounts.

Even though the U.S. economy has recovered the millions of jobs it lost during the pandemic, Americans are vulnerable. Just in the last year, workers have had to cope with sky-high inflation, a bear stock market, rising borrowing costs and a myriad of ripple effects from the threat of economic recession. They're also barraged with messages that they're not ready financially for their golden years.

Dipping into tax-deferred savings ahead of retirement isn’t recommended for two main reasons: Depleting an account means missing out on investment returns that compound over time. Plus, the worker has to pay income tax on any withdrawn amounts and, if they're under the age of 59½, typically an additional 10% penalty, depending on the circumstances.

One of those downsides won’t be quite as much of a factor after next year, when a new law will allow $1,000 emergency withdrawals without the 10% penalty and let employers link a penalty-free (but after-tax) emergency savings account to retirement plans for lower-paid workers. 

If a worker can afford it, borrowing from a retirement account is generally considered a better option than withdrawing. Borrowers don’t have to pay income tax or a 10% penalty unless it isn’t paid back (through regular paycheck deductions) in the required timeframe, plus the interest goes back into the account. Still, some plans charge fees on the loans. 

Last year, 41% of millennials, 40% of Gen Zers, 37% of Generation Xers and 24% of boomers dipped into their plans. 

The most common reasons for borrowing were financial emergencies, followed by paying off debt such as credit card bills, meeting everyday expenses, covering medical bills and paying for home improvements. For Gen Zers (born 1997 to 2012,) paying debt was the most common reason, while for millennials (born 1981 to 1996,) a financial emergency topped the list.