A record number of Americans are withdrawing from their 401 k retirement plans in order to cover a financial hardship as the high inflation rages, according to new data from Vanguard Group.
Nearly 0.5% of workers in employer sponsored 401 k plans made a so-called hardship withdrawal in October, according to Vanguard, which tracks about 5 million accounts. It is the highest level since Vanguard began tracking the data in 2004 and is a major increase from the 0.3% rate recorded during the time last year.
Fiona Greig, global head of investor research and policy at Vanguard, said the recent increase in households drawing on their employer-sponsored retirement accounts could be a sign of deterioration in the financial health of the U.S. consumer.
Hardship withdrawals allow workers to tap their 401 k for immediate and heavy financial need. If a person is under the age of 59, the penalty can be waived if they provide adequate evidence that the money is being used for a qualified hardship, such as a medical expense.
A person who takes a hardship withdrawal can't pay it back to their 401 k and cannot roll that money into another retirement savings account.
The increase in Americans tapping their 401 k s for emergency purposes comes because of the rising inflation that has eroded workers' purchasing power.
The consumer price index, a measure of the price for goods including gasoline, groceries and rents, increased by 0.4% in October from the previous month, according to the government last month. On an annual basis, prices went up 7.7%, near a 40 year high.
The average hourly earnings for all employees fell by 2.8% in October from the same month a year ago, when accounting for inflation. Average hourly earnings dropped by 0.1% last month when factoring in the consumer price spike.
Americans are increasingly relying on savings and credit card debt to pay for necessities. The Commerce Department reported last week that the savings rate fell to 2.3% in October, the lowest in 17 years. The Fed data shows that household debt increased by 15% during the third quarter, at the fastest rate since 2008, with credit card balances jumping by 15%.
Tuan Nguyen, U.S. economist at RSM, said that savings and inventories won't bolster spending for too long. It is likely that this holiday season will be the last for a while with such a strong spending push.