Fidelity Investments and AARP are warning Americans against tapping retirement accounts early, saying growing financial pressure is pushing more workers to treat 401(k)s like emergency savings accounts despite steep long-term costs.

According to guidance cited by AARP, workers who withdraw money from a 401(k) before age 59½ can lose 25% to 35% of the withdrawal to taxes and penalties alone. AARP cited an example where a $20,000 withdrawal could leave savers with only $12,000 to $14,000 after deductions.

The larger concern, however, is the loss of long-term compounding. Money removed from retirement accounts no longer grows tax-deferred over decades, potentially reducing retirement balances significantly over time. Financial planners warn that the long-term growth lost from early withdrawals can ultimately cost savers far more than the initial taxes or penalties.

The IRS generally treats withdrawals before age 59½ as early distributions subject to a 10% penalty unless specific exceptions apply, while financial experts warn the long-term compounding loss begins as soon as the money leaves the account.

Hardship Withdrawals Rise

The warning comes as hardship withdrawals continue climbing across the U.S. retirement system.

Vanguard reported that 6% of 401(k) participants took hardship withdrawals in 2025, up from 4.8% a year earlier, according to a March report. Fidelity separately said hardship withdrawals affected 2.5% of workers in 2025.

The withdrawals are increasingly tied to urgent financial needs, including medical expenses, debt obligations and preventing foreclosure or eviction.

Separate survey data showed that nearly half of Gen Z savers had already tapped retirement accounts to cover unexpected bills or debt payments, underscoring growing financial instability among younger workers.

Retirement Stress Grows

The trend reflects broader pressure across household finances as inflation and elevated living costs continue squeezing consumers.

Recent retirement policy discussions have also highlighted structural gaps in the system, with estimates from the Economic Innovation Group showing that roughly 54 million Americans lack access to employer-sponsored retirement plans.

Fidelity and AARP said alternatives such as emergency savings funds or 401(k) loans may help workers avoid permanently damaging retirement balances.

The organizations emphasized that retirement accounts are designed for long-term investing, warning that repeated early withdrawals can create lasting setbacks that become increasingly difficult to recover from over time.

Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.

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