Withdrawals from retirement funds due to hardship have tripled over the last 5 years.

It's no secret that many Americans have been struggling with their finances and rising prices over the last few years. This problem has been made worse by the effects of the COVID-19 pandemic. Now, a recent report from Fidelity Investments has revealed an alarming trend in pension funds.

The report states that the number of Americans withdrawing from their retirement funds has tripled in the last five years. In 2018, the percentage of Americans with a 401 who withdrew money to pay for financial hardship was around 2.1%. However, by June of this year, that figure had risen to 6.9%.

The IRS defines a hardship withdrawal as an emergency removal of funds from a retirement plan that can be made in the event of an "immediate and heavy financial need," such as a job loss or medical emergency. The percentage of Americans claiming hardship has risen each year since 2018, with the exception of 2020, when the CARES Act allowed people to take up to $100,000 out of a retirement plan without facing a penalty. That year, the percentage of Americans withdrawing from their retirement plans rose to an alarming 15.1%.

Fidelity Investments advises Americans to build an emergency fund to protect themselves from costly withdrawals from their retirement funds that can result in a dip in their retirement savings. According to Fidelity, those with emergency funds are more financially confident and have higher credit scores. Additionally, emergency funds are usually in cash, giving households quick access to money, which keeps them from high-interest alternatives such as payday loans.

Bank of America reported in August that 15,000 of the firm's 401 plan participants made a withdrawal from their accounts in the second quarter of the year, a 36% increase from the same period in 2022. This is likely due to the fact that the prices of food, housing, and transportation have risen significantly since the pandemic began and have shown little signs of slowing down despite the US economy performing better than expected.

It's clear that many Americans are struggling to make ends meet and are increasingly relying on their retirement funds as an emergency source of income. It is important for individuals to have an emergency fund to help them manage their finances and avoid costly penalties and dips in their retirement savings.

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