More Americans took early withdrawals from their 401(k) plans than ever before in 2023, according to internal data from Vanguard Group. 3.6% of its plan participants, those under 59½ years old, decided to pay the increased income tax and a 10% penalty for their withdrawals.
Rob West, president of Kingdom Advisors, says the Biden economy continues to squeeze Americans.
"Inflation is up across the board," he states. "Americans are feeling that everywhere. The problem is they were living off of a COVID stimulus that's now gone."
Nearly 40% of those who took a hardship withdrawal last year did not spend the money on vacations; they reportedly did so to avoid losing their homes.
"Unfortunately, they're turning to 401(k) accounts, which, because of the run-up in the market, they've seen some recovery there, and they're looking at that as a source of cash to be able to cover bills they can't otherwise afford," the financial advisor explains.
Others ran up their credit cards to make ends meet, but West says there are better, albeit much more difficult, ways to navigate a bad economy.
"We know credit card debt is now at record levels, having surpassed $1 trillion," he relays. "We've got to dial back our spending in light of this high inflation."
He recognizes that will require some tough decisions, like downsizing homes, trading in sports cars for economy models, or sending kids to their second or third choice of colleges.
"We've got to go back to that spending plan -- recognizing when expenses go up, we have to rightsize the budget and live within our means," West submits.
The Associated Press recently reported that consumer prices rose 0.4% from January to February, higher than the previous month's figure of 0.3%. Compared with a year earlier, consumer prices rose 3.2% last month, above January's 3.1% annual pace.
Excluding volatile food and energy prices, so-called "core" prices climbed 0.4% from January to February, matching the previous month's rise and a faster pace than is consistent with the Fed's 2% target.
Core inflation is watched especially closely because it typically provides a better read of where inflation is likely headed.
