Vanguard expert offers tips on hardship withdrawals

Hardship withdrawals from retirement accounts are on the rise, and advisors, investors and plan administrators need to know the options.

Spiking inflation coupled with a sinking stock market have forced more investors to tap their retirement savings for cash. Fiona Greig, a leading expert in household finance, has a front row seat to the unfolding crisis in her position as the global head of investor research and policy in Vanguard’s investment atrategy group.

InvestmentNews caught up with Greig to learn about the level of investor stress she is seeing in the market, as well as the best way to approach hardship withdrawals.

InvestmentNews: A recent Vanguard survey showed a great deal of market pessimism among investors. What are you seeing and hearing?

Fiona Greig: The stock market delivered poor returns in 2022, and our survey of some 2,000 Vanguard investors suggests that the recent past is coloring their view of the near-term future.

On average, they expect the stock market to rise by just 0.6% in the 12 months through October 2023, their most pessimistic outlook since the survey began in 2017. On a more optimistic note, our clients expect stocks to deliver stronger long-term returns. They forecast an average return of 7.2% for the next decade.

IN: A bear market coupled with a slowing economy might spur more Americans to tap their retirement accounts to make ends meet. How big a possibility is this scenario?

FG: A slowing economy is a bigger concern than a bear market simply because job losses and pay cuts put immediate pressure on household liquidity. Vanguard’s base case is that the U.S. economy will slow in 2023. If so, we might see continued growth in the number of workers who are tapping their retirement accounts.

IN: If a person has to use retirement funds for an emergency, what is the best way to make a hardship withdrawal so it doesn't sting too much?

FG: For workers under age 59½, a hardship withdrawal will generally be subject to a 10% penalty and income tax. The only way to dull the sting is to limit the withdrawal to the minimum amount necessary. If a plan offers loans, workers can borrow from their balances without paying penalties or taxes. But they’ll need to be in a position to repay the loan. And if they leave their employer plan, they may need to pay the entire loan back all at once or be subject to taxes and penalties.

IN: What are the rules and regulations investors need to know before using retirement funds to bridge a financial gap?

FG: It is best to check with your plan administrator in the case of considering a withdrawal to bridge a financial gap. They can explain the potential tax implications and affect on your retirement funds.

IN: How can an investor catch up with their retirement savings once they are over the proverbial hump?

FG: Some retirement plans allow participants to opt into automatic annual increases in their contribution rates. This strategy can help any retirement saver, particularly those who need to make up for an earlier setback.