- A recent report from Fidelity found that average 401(k) balances fell 4% in the third quarter, but withdrawals and loans increased.
- Most financial experts advise against raiding your 401(k) because you’ll lose the power of compound interest.
- In times of turmoil, here’s what you need to know before tapping into your retirement savings.
Retirement account balances fell sharply last year, picked up in early 2023, but fell again in the most recent quarter.
A recent report from Fidelity, the nation’s largest 401(k) plan provider, found that the average 401(k) balance fell 4% to $107,700 in the third quarter, due to volatile market conditions. It is said that there is also an influence. In total, the financial services company handles more than 35 million retirement accounts.
The average balance in individual retirement accounts also decreased by nearly 4%, from $113,800 in the second quarter of 2023 to $109,600.
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Despite the market turmoil, the total savings rate, which includes employee and employer 401(k) contributions, held steady at 13.9% in the third quarter, similar to last year. This is just below the 15% savings rate recommended by Fidelity.
But there were other signs of trouble.
In extreme circumstances, savers may be subject to a 10% early withdrawal fee if there is evidence that the funds are being used to cover qualifying hardships, such as medical expenses, losses from natural disasters, or the purchase of a primary residence. You can receive difficult distributions without having to incur. Prevent eviction and foreclosure.
reports that the proportion of participants taking advantage of such difficult withdrawals is on the rise. Fidelity Investments and american bank Fidelity said the loans were primarily used to avoid foreclosure or eviction or to cover medical expenses.
The number of 401(k) plan participants who made hardship withdrawals increased by 13% compared to the second quarter and compared to the first quarter of this year, according to Bank of America’s recent Participant Pulse report. and the average withdrawal amount was just over $5,000.
Given record high levels of credit card debt; personal savings rate Mike Shamrell, vice president of thought leadership for workplace investing at Fidelity, said more than half of adults are living paycheck to paycheck, and this increase is due to some households struggling in the face of inflation and rising costs of living. He said that it shows that
Still warns that withdrawal in difficult circumstances should be a ‘choice of last resort’ Joe Buhrmann, Senior Financial Planning Consultant at eMoney Advisor
Most financial experts advise against raiding your 401(k) because you’ll lose the power of compound interest.
“Drainage” from plan accounts through 401(k) loans and withdrawals can have a significant impact on retirement readiness, said Sharon Carson, retirement strategist at JPMorgan Asset Management. .
From leveraging home equity to taking out a personal loan, households should consider what funds are available in times of financial stress before borrowing from retirement accounts.
But in some cases, a 401(k) loan may be preferable to other options, Fidelity’s Mr. Shamrell said. Under federal law, workers can borrow up to 50% of their account balance or $50,000, whichever is less, without penalty, as long as they pay it back within five years. (There may be other conditions, and if you are fired or find a new job, most employers will require you to repay the outstanding amount in a shorter period of time. )
“In some cases, a loan is more effective than signing up for a credit card,” said Mr. Shamrell.
Additionally, in other situations, especially for cash-strapped consumers who live paycheck to paycheck, it may be helpful to take emergency expenses out of a hardship fund withdrawal rather than taking out a loan and having it deducted from your take-home pay. It may even make more sense to cover all of this at once. There is also a housing allowance, he added.
