Yet another sign that persistent high inflation is squeezing American households. A new report shows the number of people taking "hardship" withdrawals from their 401(k) reached an all-time high in October. The overall number is still very low---less than one percent---but spiking to its highest level on record is an ominous sign for the economy. The survey shows a similar rise in non-hardship 401(k) withdrawals and 401(k) loans, while a separate survey has a majority of Americans cutting back on their retirement savings.
All of this taken together is not encouraging, according to financial expert Derrick Kinney. "Most of these people are probably tapping into their checking and savings first, before tapping their 401(k)," he tells KTRH. "So this could be a sign that people are really feeling crunched financially right now."
The depletion of savings and retirement funds also inevitably leads to another issue---debt. "This is a sign that perhaps the overall economy is slowing, and we might see people start to use credit cards more often," says Kinney. "So my worry is we're likely going to see more debt by consumers in 2023."
If you're one of those people who needs cash in a pinch, Kinney does not recommend touching your 401(k), or any retirement account, except as an absolute last resort. "Tapping the 401(k) is one of the worst ways to take money, because it takes away some of the future benefits of your 401(k)," he says. "You have to pay yourself back, so it will actually cost you and make you have to work longer into retirement than you planned on."
While inflation is finally slowing a bit, Kinney believes a recession is still a strong possibility within the next year. "It may not be as severe a recession if inflation continues to improve," he says. "That's a welcome sign for consumers...however, we might still see job layoffs, we might see people having to take pay cuts."
"So I think ultimately consumers face some serious headwinds going into the new year."