Americans finished 2025 with more money in their retirement accounts than at any point in history. The average Vanguard 401(k) balance hit a record $167,970, up 13% in a single year, driven by strong stock market gains and the quiet mechanics of automatic enrollment. The headline numbers look encouraging.
What sits underneath them is a different story entirely, and Vanguard is now warning that a growing number of workers are erasing years of retirement progress without fully understanding what they have done.
What Vanguard’s data shows about 401(k) hardship withdrawals in 2025
Vanguard’s 2026 report on Americans’ savings habits found that 6% of participants in its 401(k) plans took a hardship withdrawal in 2025, up from 4.8% in 2024 and triple the roughly 2% annual rate recorded before the pandemic. It marks the sixth consecutive annual increase in the rate of hardship withdrawals since Congress loosened the rules in 2018 by eliminating the requirement to take out a 401(k) loan before making a withdrawal.
The median withdrawal in 2025 was $1,900. That number understates the real cost. Unlike a 401(k) loan, a hardship withdrawal does not get repaid.
The money is gone from the account permanently, and with it goes every dollar of compounding growth that $1,900 would have generated between 2025 and retirement. For a worker in their 30s, that figure could represent $10,000 or more in lost retirement wealth, according to Axios.
More Vanguard:
- Vanguard challenges the S&P 500 as a one-stop strategy
- Vanguard exposes the account costing parents $25K
- Vanguard says 30% of millionaires feel broke, but it can be fixed
Jeff Clark, Vanguard’s head of defined contribution research, told Investopedia that the rising incidence of hardship withdrawals highlights the importance of setting aside money for emergencies outside retirement accounts.
“More workers are automatically enrolled, saving at higher rates, and building meaningful balances, which means more people actually have retirement assets available if a financial shock occurs,” he said.
Why 401(k) hardship withdrawals have tripled since 2020
The tripling of the hardship withdrawal rate from roughly 2% before the pandemic to 6% in 2025 reflects a combination of economic pressure and regulatory change working in the same direction.
On the economic side, the picture is specific. Layoffs surged to their highest level since the pandemic in 2025. Credit card delinquencies hit a 13-year high.
Excluding health care, nonfarm payroll employment fell throughout most of the year. For a significant portion of the workforce, the strong headline economy and the lived experience of monthly expenses have not been the same thing, according to Investopedia.
On the regulatory side, two pieces of legislation accelerated the trend. Congress’s 2018 reform eliminated the requirement to take a loan before a hardship withdrawal. The SECURE 2.0 Act, passed in 2022, went further by allowing penalty-free emergency distributions of up to $1,000 once every three years.
Plan administrators were also permitted to rely on self-certification rather than documentation, removing another friction point. Each change made it easier and faster for a worker under financial pressure to dip into their retirement balance, according to Axios.
Voton/Getty Images
The emergency savings gap driving workers into their retirement accounts
The most direct cause of hardship withdrawals is not financial recklessness. It is the absence of any alternative. Vanguard found that 45% of 401(k) participants have less than $2,000 in emergency savings.
When an unexpected expense arrives––a medical bill, a car repair, a gap between jobs––a retirement account is often the only liquid asset available, according to Fox Business.
The top reasons workers gave for taking hardship withdrawals in 2025 were avoiding foreclosure or eviction and covering medical expenses. Those are not discretionary decisions. They are last resorts, made by workers who have exhausted other options and are choosing between losing their home and losing years of retirement savings.
Lower-income workers are significantly more likely to take hardship withdrawals than higher-income participants. That is partly because lower-income workers have less emergency savings, but it is also because automatic enrollment has brought more of them into 401(k) plans in recent years.
A record 79% of large Vanguard plans auto-enrolled new hires in 2025, up from 34% in 2013. The effect is that more lower-income workers now have retirement balances to tap into when they face financial emergencies, according to Investopedia.
Key figures from Vanguard’s 2026 retirement report that were not covered above:
- 401(k) loans, an alternative to hardship withdrawals that must be repaid and are not taxed, remained flat in 2025 and stayed below pre-pandemic levels; the fact that loans did not rise while hardship withdrawals did suggests workers are choosing permanent withdrawals over temporary ones, which carries a more severe long-term cost, according to Fox Business
- 69% of Vanguard participants are now in professionally managed allocations such as target-date funds, balanced funds, or managed accounts, an all-time high; that group traded four to five times less frequently than other investors during the market volatility following the Trump tariffs in April 2025, suggesting automatic features are improving both saving and investment behavior simultaneously, according to Investopedia
- Vanguard’s research suggests participants with access to dedicated workplace emergency savings programs are significantly less likely to take hardship withdrawals; employer-sponsored emergency savings accounts are increasingly being discussed as a policy solution to reduce retirement account leakage, CBS News notes.
- IRA hardship withdrawals also trended higher in 2025, extending the pattern beyond employer-sponsored plans; the parallel rise in both 401(k) and IRA withdrawals suggests the underlying financial stress is broad rather than concentrated in a single account type, Fox Business reported.
- Nearly half of all Vanguard participants increased their contribution rates in 2025, either independently or through automatic annual increases; the simultaneous rise in contributions and hardship withdrawals reflects a two-speed retirement savings picture within the same workforce, Investopedia confirmed
What the 401(k) hardship withdrawal trend means for American workers and retirement security
The coexistence of record retirement balances and record hardship withdrawals is the central tension in Vanguard’s 2025 data. Both numbers are real.
They are describing different populations within the same workforce. The workers driving record balances are largely not the same workers driving record withdrawals.
For workers considering a hardship withdrawal, the full cost is rarely visible at the moment of decision. The taxes owed, the potential 10% early withdrawal penalty for those under 59 and a half, and the permanent loss of compounding growth can collectively transform a $1,900 emergency withdrawal into a retirement shortfall that takes years to rebuild.
Financial advisers consistently recommend exhausting every other option first, including 401(k) loans, health savings accounts, and assistance programs, before touching retirement funds.
The broader implication of Vanguard’s warning is structural. The retirement system was designed to build long-term wealth. It was not designed to be an emergency savings account.
When nearly half of participants have less than $2,000 available for an emergency outside their retirement plan, the line between those two functions blurs in ways that make long-term retirement security harder to achieve for the workers who need it most.
Related: A $2 billion tech firm is halting 401k contributions for staff
