Vanguard says more Americans are draining their 401(k)s early

You probably checked your 401(k) at some point last year and liked what you saw. Markets were up. Balances were climbing. The number on the screen looked like progress.

But as I worked through the latest retirement data, a different pattern became clear. A growing number of Americans looked at that same balance and saw something else: a lifeline. Not for retirement, but for right now. Medical bills. Rent. An emergency that couldn’t wait 30 years.

Vanguard just released an early look at its annual How America Saves report, one of the most comprehensive snapshots of how workers are actually using their retirement plans.

The dataset covers nearly 5 million participants, and after digging through the numbers, it tells two very different stories.

One is a story of record highs and retirement systems working the way they were designed to work. The other is a story of financial pressure quietly pushing more workers to tap accounts that were never meant to function as emergency funds.

After reviewing the report and the trends behind it, here’s what Vanguard found, what’s driving the split, and what it means for anyone feeling the same squeeze right now.

Hardship 401(k) withdrawals and balances both hit record highs

Average 401(k) balances jumped 13% in 2025 to a record $167,970, according to an early preview of Vanguard’s How America Saves 2026 report released this week. The median balance also climbed 16% to $44,115.

The S&P 500 returned 16% in 2025, international equities gained 32%, and U.S. bonds rose 7%. But saving behavior also improved.

Forty-five percent of participants increased their deferral rates, matching the record high from 2024. And 69% of participants were invested in professionally managed allocations, an all-time high.

At the same time, hardship withdrawals hit 6%, up from 4.8% in 2024 and well above the roughly 2% pre-pandemic average.

The median withdrawal amount was $1,900, according to separate reporting from CBS News. Foreclosure prevention, eviction avoidance, and medical expenses were the most common reasons people tapped their accounts.

Hardship withdrawals rose for 6 straight years after Congress relaxed 401(k) rules

The steady climb in hardship withdrawals did not begin with the current economy. Congress overhauled the process for 401(k) hardship withdrawals in 2018, eliminating the requirement that participants take a plan loan before qualifying for a withdrawal.

Since then, hardship rates have increased every year, according to IRS guidance on hardship distributions.

The SECURE 2.0 Act, signed in 2022, further expanded access. It allows penalty-free emergency withdrawals of up to $1,000 once every three years and introduced self-certification for hardship eligibility, removing the need for extensive documentation.

Vanguard noted that only about 3% of plans have adopted that self-certification provision so far, but the overall direction is clear: Accessing retirement money early has become easier.

Why Vanguard says the increase is not entirely bad news

Vanguard frames the uptick partly as a byproduct of success. Automatic enrollment has pulled more lower-income workers into retirement plans who previously had no savings at all.

For some of those workers, a hardship withdrawal functions as a safety net they would not have had otherwise.

“Given that it’s now easier to request a hardship withdrawal and that automatic enrollment is helping more workers save for retirement, especially lower-income workers, a modest increase isn’t surprising,” the firm wrote.

A K-shaped divide is growing between 401(k) millionaires and workers living paycheck to paycheck

The retirement savings landscape is splitting along income lines. Fidelity Investments reported that the number of 401(k) millionaires in its plans climbed to 665,000 in the fourth quarter of 2025, up from 654,000 the previous quarter.

The majority of those accounts belong to workers who have been contributing consistently for 25 years or longer, Fortune reported.

On the other end, nearly a quarter of U.S. households live paycheck to paycheck, according to Bank of America research cited in the same Fortune analysis.

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A June 2025 Vanguard study found that hourly wage workers were significantly more likely to take hardship withdrawals than salaried employees, largely because of monthly income volatility.

Separate data from Fidelity found that 19.4% of participants had an outstanding 401(k) loan in 2025, up from 18.9% the year prior. When you combine loans and hardship withdrawals, a significant share of the workforce is leaning on retirement assets to manage current expenses.

The median working-age American has only about $1,000 in retirement savings, according to a 2026 National Institute on Retirement Security report.

Even President Donald Trump’s proposed federal 401(k) match of up to $1,000 per year for workers without employer-sponsored plans faces a basic challenge: Many households cannot afford to invest that amount in the first place.

Automatic 401(k) enrollment and escalation are quietly building retirement security for millions

The strongest signal in Vanguard’s data is the continued power of automatic plan features. As of year-end 2025, 61% of Vanguard plans had adopted automatic enrollment. Among plans with 1,000 or more participants, that figure reached 79%, a record high.

How automatic features are driving real results62% of auto-enrollment plans defaulted employees at a rate of 4% or higher, a trend that has increased every year.71% of auto-enrollment plans included an annual escalation feature, the highest percentage in many years.31% of all participants had their deferral rate increased automatically in 2025 through escalation provisions.Only 5% of non-advised participants made a trade in their account, matching the record low from 2024.82% of participants held a balanced portfolio, and 69% were in professionally managed allocations.

These features matter because they counteract the inertia that keeps most workers at low contribution rates.

AARP recently flagged updated 2026 contribution limits, including a $24,500 base deferral cap and an $11,250 super catch-up for workers ages 60 to 63, but those limits only help if workers actively increase their savings rates or have auto-escalation turned on.

SECURE 2.0 adoption is picking up, but most 401(k) plans are still selective

Plan sponsors are moving cautiously on SECURE 2.0’s optional provisions. Most plans have adopted the expanded catch-up contributions for ages 60 to 63, with 13% of eligible participants contributing above the standard $7,500 catch-up limit when the option was available.

Beyond that, adoption has been slower. Only 7% of plans have implemented automatic portability, which allows separated employees to easily transfer small balances rather than cashing out.

Among the optional distribution provisions, qualified disaster recovery distributions led at 16% adoption, followed by domestic abuse withdrawals at 6% and emergency expense withdrawals at 4%. Actual usage of those new withdrawal options was minimal, under 0.5%.

What to consider before pulling money from your 401(k) early

Hardship withdrawals carry real costs that go beyond the immediate tax hit. The IRS treats hardship withdrawals as taxable income, and if you are under 59-and-a-half, you may also owe a 10% early withdrawal penalty. Depending on your bracket, that can eat 30% to 50% of the withdrawn amount.

The compounding cost most people overlook

Unlike a 401(k) loan, hardship withdrawals cannot be repaid to your account. That money, and every dollar it would have earned over the next 10, 20, or 30 years through compounding, is gone permanently.

A $5,000 withdrawal at age 35, assuming a 7% average annual return, would have grown to roughly $38,000 by age 65. That is the real cost.

Alternatives to explore before withdrawingEmergency savings or a high-yield savings account, even a small one, should be the first line of defense.A 401(k) loan, if your plan offers one, allows you to borrow from your balance and repay with interest to yourself, with no tax hit as long as you repay on schedule.Roth IRA contributions (not earnings) can be withdrawn at any time without taxes or penalties.HSA funds can cover qualified medical expenses tax-free and penalty-free.SECURE 2.0’s $1,000 penalty-free emergency withdrawal option is available once every three years for eligible plans.Vanguard’s message: The system is working, but workers have to protect gains

The overarching theme of Vanguard’s 2026 preview is that the retirement system is in better shape than it was a decade ago. Automatic enrollment, auto-escalation, and the shift to target-date funds have fundamentally improved how Americans save and invest.

But the rise in hardship withdrawals is a reminder that saving for retirement does not happen in isolation. Workers juggle student debt, health care costs, credit card payments, and emergency expenses alongside their 401(k) contributions.

Vanguard recommends that plan sponsors support employees with financial wellness resources that address the full picture, not just retirement.

For individual savers, the practical takeaway is simple. If your plan offers auto-escalation, turn it on. If it does not, set a reminder to increase your contribution rate by at least 1% each year. And before you take a hardship withdrawal, exhaust every alternative. The money you leave in your 401(k) today is worth far more than the money you pull out.

If you are considering a hardship withdrawal, TheStreet’s guide to 401(k) hardship withdrawals breaks down the full tax implications, eligibility rules, and alternatives.

Related: One simple move to supercharge your 401(k) in 2026

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