Vanguard Warns Workers Are Losing Thousands Making This 401(k) Blunder

Many Americans are doing a better job of saving for retirement than ever before. Vanguard reports the average 401(k) balance reached a record $167,970 in 2025, helped by strong market returns and steady contributions. But there is another trend moving in the wrong direction at the same time.

A growing number of workers are dipping into those retirement accounts early. According to Vanguard's How America Saves 2026 report, 6% of participants took a hardship withdrawal in 2025, which is triple the pre-pandemic rate and the sixth straight year that hardship withdrawals have increased.

If you're trying to build a stronger retirement plan, this is one trend worth paying attention to.

Hardship withdrawals are becoming much more common

For years, hardship withdrawals were relatively rare. Today, around 6% of Vanguard participants use hardship withdrawals annually.

The increase reflects growing financial pressure on many households. Inflation, higher housing costs, medical bills, and job instability have left some workers with few options when an emergency hits. Vanguard also notes that automatic enrollment has brought more lower-income workers into retirement plans, which means more people now have retirement savings available to tap during a crisis.

The median withdrawal may seem small, but the long-term cost isn't

The median withdrawal is relatively small, only $1,900 or so. At first glance, this may not seem like a retirement-threatening amount.

However, the problem is that these withdrawals are permanent. Unlike a loan, the money doesn't go back into the account. The withdrawn dollars lose decades of potential investment growth.

Consider a worker in their early 30s. If that $1,900 had earned an average annual return of 7% over 30 years, it could have grown to more than $14,000 by retirement. Even using more conservative estimates, the long-term loss can easily exceed $10,000.

A short-term cash need today can quickly become a much larger retirement setback.

The biggest reason workers are taking money out

Most hardship withdrawals are not being used for discretionary spending. In many cases, they're used for genuine needs, like avoiding foreclosure or buying groceries.

These are situations when people often don't have many realistic alternatives. When housing or health care is on the line, retirement savings can become the last available source of cash.

That reality helps explain why hardship withdrawals continue to rise despite expert advice warning against it. Many households are building retirement savings while simultaneously struggling with short-term financial emergencies.

Lower-income workers face the greatest risk

The burden of this retirement account leakage isn't even. Workers with lower incomes and hourly jobs are generally more likely to face financial issues that necessitate early withdrawals. These workers are also less likely to take advantage of an employer match and more likely to withdraw for other reasons, like leaving their job.

All of these factors can make the damage worse.

A hardship withdrawal reduces the balance, and future cash-outs after a job change can further reduce long-term retirement savings. Over a career spanning several decades, these repeated leaks can add up to tens of thousands of dollars in lost retirement assets.

Taxes and penalties can make the damage even worse

For workers under 59 1/2, a hardship withdrawal not only reduces retirement savings. The distribution is typically subject to normal income tax, and it may also trigger a 10% early withdrawal penalty.

That means a worker withdrawing only $1,000 might ultimately keep far less after taxes and penalties. The result is a double hit: less money available during the emergency and less money invested for retirement.

Why an emergency fund matters more than ever

One of the clearest lessons from Vanguard's data is that retirement accounts often become emergency funds when dedicated emergency savings are missing.

Financial planners frequently recommend maintaining three to six months of essential expenses in a separate savings account. While building that cushion can be difficult, it provides a critical layer of protection between a temporary financial crisis and a retirement account.

Without an emergency fund, workers may find themselves repeatedly forced to choose between today's bills and tomorrow's retirement security.

A 401(k) loan is usually the less damaging option

There are situations where retirement savings may still need to be accessed.

When available, a 401(k) loan is generally less harmful than a hardship withdrawal because the money is repaid into the account over time. Loans are not risk-free, though. Leaving a job before repayment can create complications, and missed payments can trigger taxes and penalties.

Still, when compared with a hardship withdrawal that permanently removes money from retirement savings, a loan often preserves more of the account's long-term potential.

Bottom line

Hardship withdrawals may solve immediate financial problems, but they can create a much larger retirement problem down the road. Vanguard's data shows more workers are turning to their 401(k)s in emergencies, often sacrificing years of future growth for a relatively small amount of cash today. If staying on track for retirement is a priority, protecting those retirement dollars should be part of any emergency planning strategy.

Workers who keep even a modest emergency fund are generally less likely to interrupt retirement contributions during financial setbacks. That means the benefits go beyond simply avoiding withdrawals. Having cash reserves available could help you continue funding your retirement plan through difficult periods.