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401(k) Hardship Withdrawals Soar to Record Levels Amid Cost-of-Living Crisis

Unusual Whales

• 2 min read

Americans Tap Retirement Savings at Historic Levels

Hardship withdrawals from 401(k) plans have surged, jumping from 2% in 2018 to 5% in 2024, according to Fidelity Investments.
The increase comes as rising costs for essentials—food, housing, healthcare—and inflation averaging ~4.2% over the past five years squeeze household finances.
Because of these pressures, many workers lacking adequate emergency savings are turning to their retirement accounts as a stop-gap.

Fact-Check & Underlying Drivers

✅ What the data shows

  • Fidelity’s data reveals the highest rate of hardship withdrawals since it began tracking the metric at 5% in 2024.
  • Workers who have employer-sponsored emergency savings accounts are less likely to take large hardship withdrawals, regardless of income.
  • Plan loans (which must be repaid) are also increasing: the share of workers with outstanding 401(k) loans through Fidelity reached ~19%.

⚠️ What to watch

  • Although the percentage remains “only” 5%, the direction is disturbing—especially when early withdrawals permanently reduce retirement balances.
  • Hardship withdrawals remain taxable and typically trigger a 10% penalty if you’re under age 59½.
  • The trend signals a broader weakness: the fact that retirement accounts are being used as emergency funds undermines the long-term retirement goal they were designed for.

Why this matters

This phenomenon exposes two key risks:

  • For households: raiding retirement savings reduces future compound growth and can delay or diminish retirement readiness.
  • For markets and the economy: when a significant portion of the workforce is financially stressed and dipping into retirement, consumer spending may soften—squeezing companies that rely on discretionary consumption.

Market & Options-Flow Implications

1. Firm & sector-specific risk

  • Consumer‐facing companies, especially those targeting lower or middle‐income segments, may start feeling pressure if fewer workers have disposable income (due to debt servicing or retirement drain).
  • Firms in financial services, retirement-plan administration, or credit products should watch for shifts in borrowing behaviour, plan loans vs withdrawals, and the associated regulatory/behavioural risks.

2. Options & hedging themes

  • Volatility in consumer discretionary stocks: If sentiment turns bearish because consumers are financially squeezed, implied volatility might rise in stocks exposed to discretionary spending.
  • Skew shifts: As downside risk becomes more pronounced (e.g., weaker consumer spending), put options may become relatively more expensive compared to calls for affected equities.
  • Hedging flows: If traders see increased early withdrawals as a signal of economic stress, they might increase hedge positions via index puts or tail protection.

3. Tickers to monitor via Unusual Whales

Keep an eye on unusual options flow (block trades, large volume, skew changes) in these tickers for early signals of shifting consumer risk.

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