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If workers don’t plan appropriately for various near-term and long-term financial needs, they may tap their retirement savings for help, which could jeopardize their ability to retire comfortably when they want.
As discussed in Vanguard’s paper, How Americans Withstand Financial Hardships, plan sponsors can embrace our approach to financial wellness to help participants better prepare for life’s planned and unplanned expenses—and stay on track for retirement.
Who uses hardship withdrawals and why?
A double-edged sword
SECURE 2.0 offers new options
Effective January 1, 2024, plan sponsors can offer an emergency savings account as part of the retirement plan for non-highly-compensated employees. Participants could contribute up to $2,500 (or lower if set by the employer) on a Roth basis and could be eligible for an employer match.
Effective January 1, 2024, plan sponsors can offer an annual retirement plan withdrawal up to $1,000 for personal or family emergencies. The withdrawal would be exempt from the 10% early distribution penalty and could be repaid within three years, however participants may not take further emergency distributions during that period unless prior emergency distributions have been repaid.
Plan sponsors can offer withdrawal options for victims of domestic abuse and for those affected by a federally declared disaster. Previous legislation also provided new withdrawal options for military service, birth or adoption of a child, and the coronavirus.
Focus on financial wellness
Being financially prepared for the unexpected allows participants to make progress toward their long-term goals without impediments. To that end, we recommend participants have at least $2,000 saved for common spending shocks, as well as three to six months of living expenses reserved in case of job loss.
Want to learn more? Visit our financial wellness resources or contact your Vanguard representative.
- All investing in subject to risk, including the possible loss of principal.
- Diversification does not ensure a profit or protect against a loss.
- How America Saves 2023, Vanguard.