When should you borrow from your 401(k)? Use 'as a last resort,’ Fidelity adviser warns
A growing number of Americans are taking out ‘hardship’ withdrawals from their 401(k)s to cover emergency costs
With a rising number of Americans tapping into their 401(k)s to cover emergency costs, many workers struggling with high inflation may be wondering when’s the right time to borrow from their retirement savings.
According to Fidelity Investor Centers branch leader Leanna Devinney, this option should be used "as a last resort."
"Our retirement savings are for our retirement or those long-term goals that we have, so when we're taking a withdrawal or even a loan from it, but focusing on withdrawals, we're impacting our future goals," Devinney told Fox News Digital on Thursday. "So we do want to treat the hardship withdrawals as a last resort."
While the Vanguard Group reported that 2.8% of workers participating in employer-sponsored 401(k) plans made a so-called "hardship" withdrawal in 2022, Devinney noted that Fidelity saw 2.1% of its customers taking a 401(k) withdrawal or loan.
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"We saw costs at the grocery store going up and the gas pump when you're there, now we're seeing spending rise. And then another part was just the economy in the market, we saw significant volatility and many felt strapped," Devinney said. "And so that could be a couple of reasons for the cause of needing the withdrawals."
Taking out a retirement loan or withdrawal ultimately impacts your future goals, the adviser argued while noting, "for many, retirement savings has also been treated as emergency savings. When an emergency does come up, if you don't have other accounts to access and you need to go to your retirement accounts, that's when we see it happen."
Emergency purposes include medical expenses, risk of foreclosure, tuition or student loans for you or your children, and even funeral costs all qualify for hardship withdrawals. When deciding how to pay for the expenses, Devinney offered a "hierarchy" of emergency saving options.
"If you have a savings or checking account to exhaust first, our rule is really to have three to six months of your expenses set in an emergency savings account," the Fidelity branch leader said. "For many, that's hard. So we at least want to make sure you have a buffer of $1,000 just as a starting point."
In the case that additional savings aren’t feasible, Devinney suggested exploring a low-interest credit card, home equity line of credit or personal loans.
"Again, these are debt, but it's a little bit of better debt because when you take a hardship withdrawal, you may be subject to paying possible penalties for an early withdrawal, as well as taxes. So exploring those alternatives is really important," she said.
For Americans trying to save money in the current economic environment, Devinney recommended having a specific financial goal in mind.
"Is it an emergency fund? Is it wanting to buy a home in 10 years? Is it wanting to go on that great vacation? Is it retirement 30-plus years away? Start with the goal," she advised. "When we have the goal, we then can get into how we get to the goal."
Next, it’s important to plan each step to achieve that goal.
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"If it's an emergency fund, we start with that number and then we build a plan that, week after week or month after month, we're contributing a certain amount from our paycheck into a savings account to get to that goal we have," Devinney explained. "I find habits such as, 'set it and forget it,' automatic contributions, things like that really help, and then give yourself those financial checkups. Keep proactively checking in and setting those different mile markers."
"Certainly, if you have an employer-sponsored plan, you want to contribute to your retirement savings and get the company match up. That's part of it," she continued. "But really setting a goal to build up that savings nest egg, that if a life event happens, if an emergency happens, you're not going to your long-term retirement wealth to use that for the emergency and you go to your savings."
FOX Business' Megan Henney contributed to this report.