Report : DC Retirement | September 19, 2023

How Americans withstand financial hardships

Read time: 5 minutes

Hardship withdrawals increased in 2022. What does this mean for participants' retirement readiness?

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?

It may come as no surprise that lower-income participants are much more likely to take a hardship withdrawal than are higher-income participants. In 2022, about 80% of hardship withdrawals taken by lower-income participants were used to avoid loss of their home, to repair damages to their home, or for medical expenses—a signal that they lacked emergency savings outside of the plan.
But hardship withdrawals aren’t only used for emergencies or unexpected events, and they aren’t only used by lower-income participants. Participants with higher incomes are less likely to take a hardship withdrawal overall, but they usually withdraw greater amounts at a time. And they’re much more likely to use the funds to purchase a house or pay for tuition, which are generally considered planned expenses.

A double-edged sword

While hardship withdrawals can provide access to much-needed funds, they come at a cost. They’re typically subject to a 10% early withdrawal penalty tax. They also deplete participants’ retirement savings and have the potential to cause more long-term financial strain—especially if withdrawals become a habit. In fact, about one-third of participants who took a hardship withdrawal in 2022 had also taken one in 2021.
To illustrate the potential impact of frequent retirement plan withdrawals, consider a participant earning $40,000 per year. If they start saving 10% of their income at age 27, and withdraw just $5,000 once every five years, their savings could be nearly 20% lower by the time they retire.
Figure 1.  Potential impact of hardship withdrawls
Source: Vanguard, 2023.
This hypothetical example assumes an annual real return of 4%, does not represent the return on any particular investment, and the rate is not guaranteed. The final account balance does not reflect any taxes or penalties that may be due upon distribution. Withdrawals from a tax-deferred plan before age 59½ are subject to a 10% federal penalty tax unless an exception applies.

SECURE 2.0 offers new options

There are circumstances where access to retirement funds is necessary to prevent further hardships. SECURE 2.0 introduces new options designed to help workers access funds when they need them most. Plan sponsors are encouraged to consider how adopting one or more of these provisions could help their employees.
Emergency savings accounts
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.
Emergency withdrawals
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.
Specific-situation withdrawals
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

Vanguard believes that educating participants on the importance of building savings outside of the retirement plan is crucial to preventing pre-retirement outflows and to their overall financial well-being. That’s why the second pillar of our financial wellness framework is preparing for the unexpected.
Source: Financial Capability in the United States: Highlights from the FINRA Foundation National Financial Capability Study. 5th edition. July 2022.

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.