This topic stemmed from a recent report from Vanguard (one of the world's largest mutual fund investment groups), which showed that 6% of their clients took a hardship withdrawal from their 401k's, up from 4.8% in 2024. For those that don't know, in the United States a 401k is a standard-issue retirement account that contains stocks, mutual funds, target-date funds, and bonds that are intended to be used to cover a large portion of your retirement. The idea around 401k's is that you will invest in them, and they will grow over time to stay by themselves. Given that traditionally savings accounts will not get the kind of yield that a 401k can (a 5-8% growth model), this means that if you start saving in your 20's and 30's, over time the 401k will give you enough money to live off of when you stop working.
In the United States, 401k's are not treated as bank accounts as a result-they come with much stricter rules. While a traditional savings or checking account is essentially yours to do what you want with it (deposit and withdraw whatever you like, though FDIC insurance and high-yield savings accounts plays a small factor in how fluid those assets are), 401k's you can only donate up to $24,500 a year (more if you're over 50), and you can't withdraw from it in the same way. Unless you are 59 1/2 years old, any 401k withdrawal comes with a 10% penalty, on top of (assuming you have a traditional 401k and not a Roth 401k) the taxes you'll also have to pay on it. After that age, which for Americans is when people start to retire, though that age may vary (particularly given that Medicare doesn't start until 65 and social security is pro-rated until you're 70 and doesn't start until you're 62), you can withdraw whenever you want, but until then you need to pay extra to get your money.
Here's where social media came in-the conversation coming out of the posts about Vanguard's study, showing more people wanted to take out a hardship withdrawal, largely sided with the idea that we shouldn't have hardship withdrawals at all, that people should be able to take out their 401k money whenever they wanted, without punishment. In some essence, this is not a particularly bad idea. Most Americans do not have a particularly robust savings account-the median amount of money that the average American has in their savings is about $5400 (the average should never be used in this case as representative because the United States, like much of the world, has a hoarded wealth problem with the superrich which skews that metric). $5400 is not enough to cover most American households in times of hardship (think things like losing your job, a medical emergency, or your house potentially being foreclosed). For American workers with a 401k, on the other hand, the National Institute on Retirement Security says that the median number is $40,000, considerably more money, and as a result, for people with retirement accounts, this is probably the most valuable asset they have short of selling their home.
There's a problem here-$40,000 is not remotely close to the number that most Americans likely need to be able to safely retire (that's about $1.5 million). It's also something that, unless you are taking that money out immediately before retirement, you're taking away from yourself. The money in your retirement account if you're in your 20's through 50's is money that you are expecting to compound. Let's say you put $5k a year into your retirement account every year with 8% growth. If you're 22, that would amount to $1.7 million. If you're 42, on that same cadence, you'd have around $300k. A huge factor in retirement savings is time-it's why you always hear "start saving early" and the money you take away now is not easily replaced later.
The government also provides a significant number of protections around 401k's as a result, knowing that in many cases this is the person's only source of income in retirement. 401k's cannot be taken in bankruptcy court and cannot be taken by creditors. If your company provides matching funds for your 401k, that is a tax deduction (a huge incentive for companies to continue to provide these, and also, given how 401k's prevent a larger amount of seniors on welfare, a benefit to society as a whole). These benefits, and the longer-term implications of people treating a 401k the same way that they treat an emergency fund, ultimately makes me think that the withdrawal penalties are worth it.
One of the weirder political ideologies of young Millennials and Gen Z, at least in their collective online presence, is that they have a bizarre combination of socialist and libertarian views around money. They expect help with huge costs, especially things driven by inflation (i.e. rising costs of houses and higher education), but also are insistent on saying things like "it's my money, I can do what I want with it." It's honestly weirdly reminiscent of Baby Boomer attitudes toward money and might be why Trump did surprisingly well with this group in 2024.
But ultimately, I think they're wrong to not want the penalties. People hopefully won't use their 401k's as savings accounts. The US economy cannot handle retirees increasingly reliant upon Social Security to pay their bills, and both Medicare and Social Security are on increasingly shaky grounds in terms of public assets even without that pressure. But the hardship withdrawals guarantee people don't use them unless absolutely necessary (i.e. losing their house, medical fees). It might be "your money" but it's money that has extra protections under the condition that you are saving it for when you retire. And while many will glibly say "I'll never retire"...getting older frequently answers that question for you with an aging body & mind; most people cannot physically do the jobs that they did in their 30's, 40's, and 50's when they reach their 70's and 80's. The withdrawal penalties help to protect people from themselves and needing to put very stringent parameters under what constitutes "an emergency."
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