TAMPA, Fla. — Results of a brand-new survey could be another indication that inflation is taking a big toll on more and more Americans.
The latest numbers come from financial company Vanguard, which found the number of people dipping into their 401(k)s hit an all-time high in October.
"Just going into your 401(k) in order to pay living expenses is not the best idea," said Financial Planner Steve Overton with Ameriprise Financial.
Overton says he gets it. Prices are high. Budgets are tight. And a 401(k) looks like a tempting way to deal with it.
"But when you take money out of a 401(k) you’ve broken the piggy bank. It’s hard to put the pig back together," Overton said, "It’s like trying to put toothpaste back in it tube. Once it’s out it’s out."
According to financial giant Vanguard, which oversees millions of retirement accounts, 401(k) hardship distributions set a record in October with .5% of workers participating in retirement plans.
It’s the highest level they’ve seen since they began measuring in 2004.
“And of course, they’re going to look at their 401(k) because it looks like an easy place to go for the money,” said Overton.
Hardship distributions first have to be allowed under a company’s retirement plan. And even then, only for big issues like foreclosure, eviction or major medical expenses.
Overton strongly suggests looking at alternatives first.
“Maybe there is a 0% interest rate deal on a credit card you could use. Family and friends might be able to help you out. Or even borrowing against assets at a brokerage firm,” he said. “All of those. Even a home equity line of credit. All of those might be a better alternative than a 401(k) withdrawal.”
Those who are under 59 1/2 years old might even face an additional 10% penalty for an early 401k withdrawal.
That’s on top of paying income tax. But the biggest burden could be years down the line.
"If you get to 65, 68 years old, and your 401(k) is this big,"Overton said, "Because you used it for household expenses 10 years earlier, you’re going to feel regret. You have to take that into consideration."
Overton suggests if you do have to tap into your savings, consider a 401(k) loan as opposed to a hardship distribution.
Loans can be paid back over several years enabling the person who took the money out to make themselves financially whole again — hopefully in time for their retirement.