Americans Tap 401(k) Hardship Withdrawals as Vanguard and Fidelity See Record Outflows

(UNITED STATES) — Americans tapped their 401(k) accounts for hardship withdrawals at record rates in 2025, with Vanguard reporting a sharp rise that retirement researchers and advocates view as a sign of cash-flow strain even as many savers’ balances grew.

Vanguard said 6% of participants in its plans took hardship withdrawals in 2025, up from 4.8% in 2024 and above a pre-pandemic average of about 2%. Fidelity reported a similar climb in recent years, with hardship withdrawals more than doubling from 2% in 2018 to 5% in 2024.

The surge puts new attention on 401(k) hardship withdrawals because they offer a window into household stress that traditional measures, such as rising account balances, can miss. A hardship withdrawal lets a worker access retirement money for an “immediate, heavy financial need,” and it can permanently shrink retirement savings.

Plan-provider figures also highlight an emerging tension in the US retirement system. Automatic enrollment and higher saving rates have helped build larger balances for many participants, while the same balances can become a backstop when everyday expenses spike.

Rising living costs stand out as a central driver of the uptick. In one snapshot of worker sentiment, 75% of workers cite rising living costs as their top stressor, and nearly 40% live paycheck-to-paycheck across income levels.

That paycheck-to-paycheck pressure extends into higher earners in a way that has drawn attention from plan administrators and policymakers. The same data show 40% of households earning over $300,000 report living paycheck-to-paycheck, as budgets absorb housing costs, medical bills, childcare and student loan payments.

Easier access to retirement money also plays a role, as policy and plan-administration changes reduced friction for some participants. Reforms since 2018 eliminated the loan-first requirement, a shift that removed an extra step that once pushed workers to borrow before taking a hardship distribution.

Congress added another piece to the access story with the 2022 SECURE 2.0 Act, which allows penalty-free withdrawals up to $1,000 yearly for emergencies, domestic abuse, or disasters. That change, alongside earlier reforms, coincided with six straight years of increases in hardship-withdrawal activity.

The withdrawals themselves often reflect acute financial shocks rather than discretionary spending. Vanguard’s data put the median hardship withdrawal amount in 2025 at $1,900, a measure that helps describe a “typical” withdrawal without being skewed by a smaller number of very large distributions.

Participants most often reported taking the money to avoid losing housing or to cover health-related bills. Vanguard’s breakdown listed avoiding foreclosure or eviction at 36% and medical expenses at 31%, followed by tuition at 13%, home repairs at 11%, and buying a primary residence at 5%.

Those stated reasons underscore how quickly a household emergency can collide with retirement policy. Housing distress and medical costs, in particular, can arrive with little warning and demand immediate cash, even for workers who have been saving steadily.

Hardship withdrawals differ from 401(k) loans, which generally require repayment and can be reversed if the borrower stays on schedule. Vanguard and Fidelity indicated loan usage has not surged in the same way, with 401(k) loans staying flat below pre-pandemic levels, suggesting the recent increase is concentrated in permanent withdrawals.

The long-term trade-off remains central to the debate over how retirement plans should function during financial stress. Hardship withdrawals are typically taxable as ordinary income and may trigger an additional 10% penalty under age 59½ unless exempt, creating an immediate tax cost on top of the loss of future growth.

Lost compounding can be the biggest unseen price, even when the withdrawal seems modest. Early withdrawals reduce retirement assets by 25% on average due to lost compounding, reinforcing why many plan sponsors and retirement advocates describe hardship distributions as a last resort.

Workers’ behavior in 2025 showed that stress and saving often coexist in the same system. Vanguard reported 45% of its participants raised deferral rates in 2025, a sign that many savers increased contributions even while a separate group pulled money out.

Emergency-savings gaps help explain why some workers turn to retirement accounts when expenses hit. Workers without 3 months’ emergency savings are twice as likely to withdraw, aligning with broader evidence that limited liquid cash can push people toward retirement funds, which are often among the largest assets available.

AARP officials say the hardship-withdrawal spike also fits into deeper concerns about retirement readiness, especially among older Americans who are nearing the end of their working years. Indira Venkat, Senior Vice President of Research at AARP, pointed to a survey finding over 20% of adults 50+ have no retirement savings, with many worried about basic expenses.

Another indicator of limited financial buffers appears in the savings many people hold outside retirement plans. Vanguard reported the median working-age American has just $1,000 saved, a level that can leave little room to absorb a rent increase, an unexpected medical bill, or a car repair without drawing from longer-term accounts.

Plan sponsors, meanwhile, often frame the rise in hardship withdrawals as a byproduct of a system that has succeeded at building balances, even as households face sharp cost pressures. Vanguard said automatic enrollment has helped participants accumulate more, and it reported its average 401(k) balance hit $168,000, up 13% from 2024, while Fidelity’s average reached $146,400, up 11%.

Jeff Clark, head of defined contribution research at Vanguard, described those accumulated balances as both a retirement asset and a form of short-term cushion. “With more sponsors auto-enrolling workers, people saving at higher rates, they’re building meaningful balances, and so they have retirement assets available if a financial shock occurs,” Clark said.

That “buffer” narrative, however, sits uneasily alongside the broader retirement-policy goal of preserving long-term savings. The same forces that build bigger 401(k) balances can leave workers feeling they have little choice but to tap them, especially when housing or medical costs rise faster than paychecks.