Last year, the number on your 401(k) screen probably looked good. Markets ran hot. Balances climbed. For millions of Americans, 2025 felt like the system finally working the way it was supposed to.

Then Vanguard looked a little closer.

The firm just released an early preview of its How America Saves 2026 report — one of the most detailed pictures we have of how nearly 5 million workers are actually using their retirement accounts. And buried inside the record-high balances is a number that deserves your full attention: hardship withdrawals hit 6% last year. That’s up from 4.8% in 2024, and more than double the roughly 2% pre-pandemic average.

Two stories are running at the same time. One is genuinely encouraging. The other is a quiet warning sign that the headline numbers won’t tell you.

The Record Highs Are Real

Let’s start with what’s actually good. Average 401(k) balances jumped 13% in 2025 to a record $167,970. Median balances rose 16% to $44,115. The S&P 500 returned 16%, international equities gained 32%, and U.S. bonds added 7%. Markets did most of the heavy lifting — but saving behavior improved too.

Forty-five percent of participants increased their contribution rates, matching the record set in 2024. Sixty-nine percent were invested in professionally managed allocations, an all-time high. Automatic enrollment reached 61% of Vanguard plans, and among large plans with 1,000 or more participants, that figure hit 79%.

The retirement infrastructure, quietly and without much fanfare, is getting better.

Now Here’s What That Record High in Hardship Withdrawals Actually Means

Six percent of participants took a hardship withdrawal last year. The median amount pulled out was $1,900, according to separate reporting from CBS News. The most common reasons: avoiding foreclosure or eviction, and covering medical expenses.

This isn’t people raiding their accounts for vacations. These are workers facing emergencies with nowhere else to turn.

The climb didn’t start last year. Congress loosened the rules in 2018, eliminating the requirement that you first take a plan loan before qualifying for a hardship withdrawal. Rates have risen every single year since. The SECURE 2.0 Act, signed in 2022, went further — allowing penalty-free emergency withdrawals of up to $1,000 once every three years and letting workers self-certify their hardship eligibility without documentation.

Jeff Clark, Vanguard’s head of defined contribution research, put it plainly: “Hardship withdrawals are driven by a few overlapping factors, including ongoing financial pressures for a subset of workers, along with administrative and regulatory changes.”

Vanguard also frames part of the increase as a byproduct of success — automatic enrollment has brought more lower-income workers into plans who had no retirement savings at all. For some of them, a hardship withdrawal is the only safety net they’ve got. “Given that it’s now easier to request a hardship withdrawal and that automatic enrollment is helping more workers save for retirement, especially lower-income workers, a modest increase isn’t surprising,” the firm wrote.

That’s a fair point. It’s also a polite way of saying the emergency fund problem in this country is serious.

The Split That Should Worry You

Fidelity reported that the number of 401(k) millionaires in its plans climbed to 665,000 in the fourth quarter of 2025. Most of them have been contributing consistently for 25 years or longer. Meanwhile, nearly a quarter of U.S. households live paycheck to paycheck, according to Bank of America research. The median working-age American has roughly $1,000 in retirement savings, per a 2026 National Institute on Retirement Security report.

One thousand dollars. That’s not a typo.

A June 2025 Vanguard study found that hourly wage workers were significantly more likely to take hardship withdrawals than salaried employees, largely because their monthly income is less predictable. And 19.4% of Fidelity participants had an outstanding 401(k) loan last year. When you combine loans and hardship withdrawals, a substantial share of the workforce is treating retirement savings like a checking account — not by choice, but by necessity.

What It Costs You to Pull Out Early

Here’s what that actually means for your money. The IRS treats hardship withdrawals as taxable income. If you’re under 59½, you likely owe a 10% early withdrawal penalty on top of that. Depending on your bracket, you could lose 30% to 50% of whatever you pull out before it hits your bank account.

But the compounding math is the part most people underestimate. A $5,000 withdrawal at age 35, assuming a 7% average annual return, would have grown to roughly $38,000 by age 65. That money doesn’t come back. Unlike a 401(k) loan, a hardship withdrawal can’t be repaid to your account.

Before you go that route, exhaust the alternatives. A 401(k) loan lets you borrow from your balance and repay it — with interest back to yourself — with no tax hit as long as you stay on schedule. Roth IRA contributions (not earnings) can be withdrawn anytime without taxes or penalties. HSA funds cover qualified medical expenses tax-free. And SECURE 2.0’s $1,000 emergency withdrawal option is available once every three years for eligible plans — penalty-free, if your plan has adopted it.

What To Do With This Information

If your plan offers auto-escalation — the feature that bumps your contribution rate up by 1% each year automatically — turn it on today. If it doesn’t, set a calendar reminder to increase your rate manually every January. One percent feels invisible in your paycheck. Over 20 years, it’s the difference between comfortable and scraping by.

And if you’re weighing a hardship withdrawal right now, slow down before you pull the trigger. The immediate relief is real. So is the permanent cost.

The system is genuinely better than it was ten years ago. Auto-enrollment, auto-escalation, and target-date funds have moved the needle for millions of people who would otherwise have saved nothing. Vanguard’s right about that.

But a record high in hardship withdrawals and a record high in balances existing in the same report, at the same time, tells you everything about where we actually are. The retirement system is working. It’s just not working equally — and for the people on the wrong side of that line, the gap is getting harder to close.