If you need additional evidence to suggest that workers need living wage salaries throughout their careers, Fidelity and Vanguard have your back. Recently, the two financial firms acknowledged that their clients are increasingly turning to hardship withdrawals from retirement savings accounts to make ends meet.
In separate reports, Fidelity stated that 2.4% of its retirement account clients made hardship withdrawals from retirement accounts in Q4 2022. Vanguard indicated that 2.8% of their clients made hardship withdrawals during the same period. Bank of America reported that the number of clients making hardship withdrawals from their retirement savings increased by one-third in the first quarter of 2023.
Analysts watch hardship withdrawals carefully because clients who make them also face stiff tax consequences. A hardship withdrawal reflects the relative financial desperation of a person since it is not like withdrawing funds from regular savings accounts. Further, fewer than half of all working age Americans even have retirement savings. When people with retirement savings begin to cannibalize their 401(k) accounts, it’s a signal that something is wrong in Middle and Upper Incomeville.
It’s not just retirement accounts that are taking a hit. The personal savings rate in the US has fallen to about 5%. That compares to a personal savings rate of more than 30% at the beginning of the pandemic. According to data from the St. Louis Federal Reserve Board, the personal savings rate between 1960 and 1985 normally exceeded 10%. Beginning in the mid-1980s, the personal savings rate declined steadily until it reached 5% in 2000.
Between 2000 and 2020, the personal savings rate floated upward from 5% to near 10%. The pandemic caused an uncharacteristically large spike, and the saving rate dropped below 5% in February 2022, where it remains. Financial advisors recommend that people save between 10%-20% of their income.
Hardship withdrawals can be avoided
The Survey of Consumer Finances, which the Fed conducts every three years, shows that households at or below the 50th percentile of income were least likely to save. Only about half of the households in this group reported saving regularly in the 2019 survey. That’s a strong indicator that the ability to save is closely tied to income.
When you have sufficient income, you can save. That creates options that enable people to avoid hardship withdrawals to pay for short-term debt and unexpected expenses. Conversely, when you don’t have savings, you need to turn to credit cards and hardship withdrawals to make ends meet.
That has long-lasting repercussions for people who go this route. The tax penalties assessed on non-qualified 401(k) withdrawals are only the beginning. The loss of capital reduces long-term gains on retirement savings, which are supposed to make up the bulk of a 401(k) account balance at the time of the holder’s retirement.
Community colleges that routinely push degree and certificate programs that lead to low wage jobs do their communities a huge disservice. This approach drastically reduces the person’s short-term and long-term earning potential. It also reduces the likelihood that the person can establish a pattern of savings that will enable the person to set aside money for retirement and manage unexpected expenses. Instead of lifting people out of poverty, this approach virtually guarantees that people will remain impoverished or in near-poverty indefinitely.
We need community colleges to focus on creating degree programs that enable their students to increase their earnings meaningfully. That should be the bare minimum expectation for these institutions, and we should not accept less.
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