The American Retirement Crisis

Just when it looked as if the baby boomer retirement picture couldn’t get any worse, it did. The number of workers making “hardship withdrawals” from their 401(k) plans hit a record during the second quarter, according to Fidelity.

A hardship withdrawal is something you take when you’re still working and still on the company plan… provided you can prove to the IRS you’re having a genuine “hardship.” 62,000 Fidelity 401(k) account holders took that step during Q2…compared to 45,000 in the same period a year ago. Ouch.

Granted, the IRS has a pretty loose definition of “hardship,” judging by this part of the press release accompanying Fidelity’s report: “Plan sponsors report that the top reasons why participants are taking hardship withdrawals are to prevent foreclosure or eviction, pay for college and the purchase of a primary residence.”

OK, foreclosure would be a genuine hardship. (Never mind that 401(k)s are usually untouchable in bankruptcy, so it makes next to no sense to tap into those funds to keep your home…but we digress.)

But a home purchase or college tuition? Let’s get this straight: These people are tapping into their retirement nest egg…paying income tax on it…plus the 10% early withdrawal penalty if they’re younger than 59½…to make their measly 3.5% FHA down payment? Or the kid’s tuition for next semester? The mind reels.

Meanwhile, 11% of Fidelity’s 11 million account holders borrowed against their plans in the last year. That brings the total with loans outstanding to 22%, a 10-year high.

Just to put these numbers into larger perspective, 43% of all workers say they have $10,000 or less in savings of any kind, retirement or otherwise, according to the Employment Benefit Research Institute. That’s up from 39% in 2009. And 27% have less than $1,000.

That same survey, conducted earlier this year, says 24% of workers postponed their planned retirement age during the previous 12 months.

Let’s hope they’re not counting on Social Security…

Dave Gonigam
for The Daily Reckoning