401(k) hardship withdrawals double as inflation strains household budgets

Key points

• The share of participants taking hardship withdrawals rose to 3.4% in 2025, up from 1.5% in 2022, marking three consecutive years of increase.
• The percentage of participants with an outstanding 401(k) loan climbed to 22.2% in 2025 from 12.4% in 2024, though the average loan amount dropped to $9,818 from $13,710.
• Average 401(k) balances for active and terminated vested participants increased 21% to $186,431 in 2025, outpacing the S&P 500’s 17.9% gain.
• The SECURE 2.0 Act, passed in late 2022, simplified the process by allowing self-certification for hardship withdrawals, a method now used by 36.7% of plans.
• Financial advisers warn that early withdrawals reduce long-term growth potential, with a $10,000 withdrawal potentially costing $32,000 in lost value over 20 years at a 6% return.

Background

This trend follows a period of elevated inflation that peaked at a 40-year high of 9.1% in June 2022. Although inflation has since eased to the 3% range, it remains above the Federal Reserve’s 2% target, continuing to pressure household budgets. The archive note regarding UK residency rules is unrelated to this US-centric financial story and provides no relevant background.

Why it matters

The shift toward using retirement accounts for immediate expenses highlights a growing gap between household income and essential costs. While access to funds can prevent crises like eviction, the long-term erosion of retirement savings may lead to lower income in later years, potentially increasing reliance on public assistance.

What to watch

Plan sponsors may continue to monitor the impact of self-certification rules on withdrawal rates. Workers are advised to explore alternatives like Roth IRAs or HSAs before tapping 401(k) funds, while financial planners emphasize the need for comprehensive budgeting to avoid emergency withdrawals.