In the most recent installment of Vanguard’s “How America Saves” annual report, data suggested that Americans are participating in retirement savings accounts at record-high levels, mostly due to the adoption of automated enrollment and access to employer-sponsored plans. However, the concerning trend that caught the attention of financial advisors was the marked increase in consumers withdrawing funds from their retirement accounts in order to pay for emergencies. In pre-pandemic days, the rate of hardship withdrawals was approximately 2%, but Vanguard reported the most recent rate to be 4.8% in 2024, with the reasons including avoiding evictions and home foreclosures, medical expenses, and tuition costs.

We have outlined strategies below that will ensure you have a strong savings cushion and will avoid dipping into retirement funds earlier than necessary.

1. Create a Realistic Budget

A solid budget is the foundation of financial stability. Follow these steps to establish a budget that works for you:

• Track Your Expenses: Monitor your income and spending to understand where your money goes. Use budgeting apps or spreadsheets to keep track.
• Prioritize Essentials: Allocate funds for necessities such as housing, utilities, food, and healthcare before spending on non-essentials.
• Set Spending Limits: Avoid overspending by setting monthly limits on discretionary expenses like entertainment and dining out.
• Use the 50/30/20 Rule: This budgeting method suggests allocating 50% of your income to needs, 30% to wants, and 20% to savings or debt repayment.

2. Build an Emergency Fund

An emergency fund is a crucial financial safety net that prevents you from withdrawing from retirement savings in times of crisis.

• Set a Savings Goal: Aim for three to six months’ worth of living expenses in an easily accessible account.
• Automate Savings: Set up automatic transfers to your emergency fund each month to ensure consistency.
• Use Windfalls Wisely: Direct tax refunds, bonuses, or unexpected earnings into your emergency savings instead of splurging.

3. Reduce Debt and Interest Payments

High-interest debt can quickly erode your finances, making it tempting to withdraw from retirement funds. Reduce your debt burden by:

• Paying Off High-Interest Debt First: Focus on credit card balances and personal loans that carry high interest rates.
• Consolidating Debt: Consider a lower-interest personal loan or balance transfer to reduce interest payments.
• Avoiding Unnecessary Debt: Limit borrowing for non-essential expenses and prioritize living within your means.

4. Maximize Savings Opportunities

Building wealth outside of retirement accounts ensures financial flexibility.

• Open a High-Yield Savings Account: Earn more interest on your savings by choosing an account with a competitive rate.
• Invest in a Taxable Brokerage Account: Grow your wealth through diversified investments that do not require early withdrawals from retirement funds.
• Contribute to an HSA or FSA: If eligible, these accounts help cover medical expenses without dipping into long-term savings.

5. Plan for Major Expenses in Advance

Unexpected expenses often force individuals to withdraw from their retirement savings. Prepare for large costs with these strategies:

• Set Up a Sinking Fund: Save a small amount each month for anticipated expenses like home repairs, vacations, or car replacements.
• Review Insurance Coverage: Ensure you have adequate health, auto, and home insurance to avoid large out-of-pocket expenses.
• Anticipate Future Financial Needs: Consider upcoming life events, such as college tuition or home purchases, and start saving early.

6. Stay Committed to Your Financial Goals

Protecting your retirement savings requires long-term commitment and discipline.

• Review Your Budget Regularly: Adjust your budget as needed to align with changes in income and expenses.
• Set Clear Savings Milestones: Track your progress and celebrate small financial wins along the way.
• Resist Temptation: Avoid withdrawing from retirement accounts by reminding yourself of the long-term benefits of financial security.

By implementing these budgeting and saving strategies, you can build a strong financial foundation and safeguard your retirement funds. Staying disciplined with your money today will ensure a more comfortable and stress-free future.

Sources:

1. Horwich, Jeff, “Amid a Resilient Economy, Many Americans Aren’t Ready for a ‘Rainy Day,’” Federal Reserve Bank of Minneapolis, May 31, 2024.
2. Martinez, Amethyst, “Vanguard Sees More 401(k) Hardship Withdrawals. That May Not Be a Bad Thing,” Barron’s, June 26, 2024.
3. Tergesen, Anne, “The 401(k) Has Become America’s Rainy-Day Fund,” The Wall Street Journal, March 5, 2025.
4. Vanguard, “Press Release: Vanguard Announces Record Retirement Savings Rates Among American Workers,” June 2024.