Increasing numbers of retirement savers are resorting to borrowing from their 401(k) plans, signaling potential economic stress, according to experts. This pattern, coupled with a significant rise in the borrowed sums, is linked to the influence of inflation on American households. David Blanchett, who leads retirement research at PGIM, considers 401(k) loans comparable to credit card debt, seeing them as early signs of economic pressure. He underscores that people are accessing their retirement funds due to financial responsibilities.

During the third quarter of this year, around 2.6% of savers—roughly 138,000 individuals—availed themselves of an average loan of $10,778 from their employer-sponsored 401(k) plans, as reported by Empower. Fidelity Investments, the leading administrator of 401(k) plans in the United States, noticed a comparable pattern, with 2.8% of savers, equivalent to 641,000 individuals, opting for loans within the same timeframe.

The rise in 401(k) loans is linked to inflation and the pressures of the cost of living, as indicated by Fidelity’s analysis of 22.9 million accounts, revealing that 17.6% of investors, more than four million people, have an outstanding loan. Additionally, there has been a rise in the average 401(k) loan amount, as indicated by the Plan Sponsor Council of America. The average loan amount in 2022 was reported to be $15,000, marking an increase compared to the range of $10,000 to $11,000 in the preceding years.

Inflation, reaching a 40-year high last year, has impacted household finances, causing a disconnect between regular income and the rising cost of living. As a result, individuals are exploring alternative methods to meet their expenses, such as resorting to borrowing from their retirement accounts.

Despite the rise in 401(k) loans, experts caution against touching retirement savings prematurely. While a 401(k) loan may be a relatively attractive option compared to credit card debt, it is recommended that households explore alternatives, as borrowing from a retirement account may have implications for long-term savings. Potential drawbacks include the risk for individuals with precarious job situations, as a change in employment might require immediate repayment. Additionally, borrowed funds are not invested in the market, potentially resulting in missed opportunities for growth.

In certain circumstances, however, a 401(k) loan might be a viable option, such as for essential expenses like medical emergencies or to secure a down payment when other funds are unavailable. Nevertheless, it is advisable to carefully weigh the potential drawbacks before making an informed decision regarding the utilization of 401(k) loans.