Data from Vanguard shows Americans are pulling money out of their retirement accounts early at record rates to help make ends meet.
Last year, 6% of Vanguard’s clients took a hardship withdrawal, which allows them to access funds in tax-advantaged retirement accounts, such as a 401(k), before they reach retirement age. That was up from 4.8% in 2024, the asset management giant said.
Taking a hardship withdrawal is not ideal for a few reasons, one of them being that investors are subject to a withdrawal penalty of 10% for taking money out of their account before 59½. On top of that, they are then taxed on any gains. However, perhaps most importantly, they rob themselves of future growth potential on that money, especially if they are still far from retirement age.
That’s just one reason 401k is shitty. 401k was invented by Wall Street to enable them to use our retirement money as “float” and collect fees on top of that. It was sold to companies as a less expensive replacement for the pension plans most jobs used to offer back in the day. It was sold to employees as a “set it and forget it” way to do “investing”, and somehow became the default option.
A 401k just rides on top of the stock market and gives the bare minimum of control to the user. Everyone has the same shitty dozen or so conglomerated investment funds to choose from. All that while the operators collect fees that might seem small to the layperson, but if those fees were allowed to compound they would actually make a massive difference in their wealth over a long career.
If your company offers a match, yeah, take the free money. Sometimes you’re allowed to take loans as well which can help if you have tons of debt. (The cool thing about those is the interest gets paid into your own account). Otherwise, basically anything else is the way to go, whether that’s a self-directed IRA or even just a regular brokerage account, real estate, literally anything. The only problem being the learning curve, but learning is more accessible than ever. If you really don’t want to learn there are also broker-managed accounts now that are fairly cheap.