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\nIf you\u2019re hungover from a weekend of celebrating\u00a0Friday\u2019s \u201cGoldilocks\u201d jobs report, MM would like to welcome you to Monday with a serving of ice cold porridge.
\nA record number of American workers cracked into their retirement savings as inflation soared last year, a dangerous sign that the bulwark amassed by households across two stimulus-flush pandemic years is fading.
\nVanguard, which oversees roughly 5 million retirement accounts, found that a growing number of participants in its employer-sponsored plans were requesting loans or seeking withdrawals as inflation rocketed over the last year. Data from the $7.2 trillion asset management firm found that a\u00a0record number of savers\u00a0used their 401(k)s to address immediate emergencies like medical bills or prolonged unemployment.
\n\u201cTheir cash buffers have waned,\u201d\u00a0Vanguard\u2019s Global Head of Investor Research and Policy Fiona Greig told MM. \u201cWe’re seeing some early signs that some families are feeling the bite of perhaps higher inflation and wages not keeping pace with that inflation.\u201d
\nAmericans built up a solid financial cushion during the pandemic \u2014 unemployment is now at a fifty-year low, after all \u2014 but the growing number of 401(k) withdrawals, along with marked declines in\u00a0personal savings\u00a0and\u00a0some troubling loan delinquency figures, suggests the upholstery is getting threadbare. That\u2019s important to keep in mind as more tech and financial services employers announce cutbacks (something we\u2019ll be watching closely on fourth-quarter earnings calls over the next several weeks).
\nPersonal financial health affects consumer behavior and economic expectations as well \u2014 something the Federal Reserve is eyeing closely as it weighs new rate hikes to stamp out inflation. We\u2019ll get a clearer sense of both later today with the New York Fed\u2019s monthly inflation survey and the Federal Reserve\u2019s consumer credit report.
\nIt\u2019s not all bad,\u00a0Greig told MM. The actual percentage of Vanguard plan participants who\u2019ve tapped into their retirement accounts to address hardships is still only about 0.5 percent. And Trump-era changes that made 401(k) withdrawals easier \u2014 along with Covid allowances that relieved the tax hit for pulling out cash \u2013 have informed people \u201cthat this is the pot of money that you can use\u201d in a time of need, she said.
\nMore are likely to take advantage of that pot of money in 2024. The government funding law signed by President Joe Biden last month includes a set of changes, known as Secure 2.0, that will allow individuals to withdraw up to $1,000 from their 401(k)s without paying a tax penalty.
\nIt also includes provisions\u00a0that will make it easier to save, including auto-enrollment in plans and new rules that would allow companies to match their employees\u2019 student loan payments with retirement contributions.
\n\u201cAre we going to see an increase in hardship? Possibly, but I think there are really positive provisions in Secure 2.0 that might help protect that nest egg,\u201d Greig said.<\/p>\n