In Case You Missed It - 401(k) Hardship Withdrawals Hit Record High

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ICYMI: 401(k) Hardship Withdrawals Hit Record High

In case you missed it, a record number of people are withdrawing funds from their 401(k) accounts due to hardship, according to a recent report from Vanguard. Although stimulus payments during the pandemic improved household finances for many in the U.S., the increase in withdrawals and loans from 401(k)s indicates that financial strength is declining.

According to Vanguard's research, the number of workers taking on loans, non-hardship withdrawals, and hardship withdrawals through October has been on the rise, soaring throughout 2022.

But the rise of hardship withdrawals is of particular concern as it reached an all-time high this year. While only 0.5% of 401(k) holders took these types of withdrawals, it is the highest level since 2004. In order for someone to make a hardship withdrawal, the Internal Revenue Service says that you must have an "immediate and heavy financial need." These types of withdrawals are subject to taxes and penalties.

The need for more liquidity comes as Vanguard's survey found its investors have growing concerns over the economy. The fear and doubt index, which is part of Vanguard's survey of its clients, reached a five-year high as respondents have become more concerned about the possibility of a stock market crash or economic disaster.

- Kristin

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Term of the Day

Risk/Reward Ratio

All investing involves risk. While investors usually are looking to profit from their investments, there's the potential to lose some—or all—of the money invested as well. The risk/reward ratio is a tool investors can use to compare the potential profits and losses of an investment.

The ratio works by comparing an investment's potential losses to its potential profits. If you can calculate the potential risk and reward of a trade, all you have to do is divide the risk by the reward to find the ratio. Think of it like this: It's the profit you can expect on an investment per dollar worth of risk involved in a trade.

This allows the risk/reward ratio to provide a quick insight into whether an investment is worth making. This is popular with day traders who want to move in and out of the market quickly as it lets them make decisions about how much to risk to generate a potential gain.

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