Average 401(k) and IRA balances reached record levels in the second quarter, driven by strong market performance, according to Fidelity Investments. At the same time, the brokerage found that a rising number of account holders withdrew money early from their retirement savings, a trend often referred to as “leakage” that can undermine long-term financial security.
Why are retirement balances hitting records?
Retirement balances rose largely because of gains in the broader stock market during the quarter, which lifted the value of the stocks, bonds and funds held inside 401(k) plans and individual retirement accounts. Continued contributions from workers and employer matches also played a role, compounding returns and pushing average balances for both account types to their highest levels on record, Fidelity reported.
Why are more workers withdrawing money early?
Even as balances grow, Fidelity noted an increase in the share of participants taking hardship withdrawals or loans against their retirement accounts. Rising living costs, unexpected expenses and financial strain appear to be pushing more savers to treat their retirement funds as an emergency source of cash, rather than leaving the money untouched to grow over time.
More people are turning to their retirement savings to cover near-term financial needs, even as overall account balances climb, the company said.
What does this mean for long-term retirement security?
Financial advisors generally caution that early withdrawals can be costly, since they often come with taxes and penalties and permanently reduce the amount of money compounding for the future. While rising balances reflect a favorable market environment, the parallel rise in early withdrawals suggests many households are struggling to balance immediate financial pressures against long-term savings goals, according to Fidelity’s analysis.
