There’s some good news and some not-so-good news on the retirement front from Vanguard.
Americans set aside a record amount of money in their 401(k) accounts last year, according to Vanguard’s “How America Saves 2026” report.
But while savings rates are up, so are the number of Americans tapping their 401(k) for emergencies.
Vanguard said 6% of participants made a hardship withdrawal in 2025, the largest share ever and up from 5% in 2024.
“Pressures such as inflation and rising interest rates contribute to increased financial strain among households, and the streamlining of the hardship withdrawal process has made retirement assets more accessible,” according to the researchers.
Vanguard’s annual report unpacks the retirement savings behaviors of nearly 5 million American workers.
On average, Americans saved 7.6% of their paycheck in their employer-provided retirement plan last year— and nearly half of participants increased their savings rate.
When you kick in employer contributions, the average total participant contribution rate was 12.1%, up from 11.6% four years earlier. The average total saving rate has increased by nearly 2 percentage points over the past decade.
“Over the past 25 years, the retirement savings system has shifted from one reliant on individual action to one powered by defaults, helping lift participation from 65% to 86% and pushing total savings rates to record highs,” David Stinnett, head of strategic retirement consulting at Vanguard, told Yahoo Finance.
Most people should target a total contribution rate of 12% to 15%, including both employee and employer contributions, he said.
Last year, more than half of participants had total employee and employer contribution rates that met those thresholds or reached the maximum contribution limit, according to the report.
That said, only 14% of savers ponied up the maximum permitted of $23,500 a year ($31,000 for participants age 50 or older).
Participants who contributed the maximum tended to have higher incomes, were older, had longer tenures with their current employer, and had accumulated substantially higher account balances, according to Stinnett.
Riding high markets
Thanks to strong returns in the equity and bond markets during 2025, average total returns for 401(k) participants reached 19.3% in 2025, according to the data.
These gains reflect the US market’s lofty 2025 performance, when the S&P 500 (^GSPC) rose 16.9%, the Nasdaq Composite (^IXIC) was up more than 20%, and the small-cap Russell 2000 (^RUT) was up around 13%.
Another wind behind these higher savings rates and returns is that “more employers are defaulting workers into higher contribution rates and providing more generous matches, reinforcing steady, long-term saving behavior,” Stinnett said.
For decades, employees had to opt into their employer’s plan and choose the rate at which to save. Employers are now increasingly making these decisions for employees through automatic enrollment and automatic annual increases. Workers can tweak the amount, but for most people, inertia rules, and they just let things ride.
Automatic enrollment defaults, or the percentage of a new contributor’s paycheck shifted into the employer retirement plan, have steadily increased over the past decade, with more than 6 in 10 plans now defaulting employees at a deferral rate of 4% or higher.
The impact of target-date retirement funds on savings also continues to reap positive rewards for savers.
At Vanguard, last year more than 8 in 10 participants in its 401(k) accounts used target-date funds. Roughly 7 in 10 target-date investors, in fact, had their entire account invested in a single target-date fund.
Investing in target-date funds keeps people from investing too heavily in stocks or bonds, and helps investors “stay disciplined even during periods of market volatility,” Stinnet said.
To recap: Target-date strategies are a “set it and forget it” way to invest savings based on a “retirement” year you pick. The fund shifts an account’s investments, typically made up of index funds, from stocks to more fixed-income and less volatile choices, such as cash and bonds, as you age.
401(k) cash-outs on the rise
Over the past five years, the percentage of participants taking hardship withdrawals has increased. One reason is that it’s easier to do so.
For years, all participants who requested hardship withdrawals were required to submit documentation regarding their specific financial need.
As of year-end 2025, only 10% of plans require that documentation. Most plans only want a summary of what it’s for, although withdrawers are told to have records available, should they ever be requested.
In 2025, more than a third of hardship withdrawals were used to avoid a home foreclosure or eviction. The second most common reason was medical expenses, with 3 in 10 withdrawals for this purpose, followed by home repair.
In addition to the increase in participants initiating a hardship withdrawal, nearly half of those who took a hardship withdrawal took more than one.
The median hardship withdrawal amount in 2025 was $1,900.
At this level, one or two withdrawals over a 30- to 40-year career are unlikely to affect retirement readiness. “However, participants who took multiple distributions are essentially using their retirement plans as emergency savings,” the researchers wrote.
Kerry Hannon is a Senior Columnist at Yahoo Finance. She is a career and retirement strategist and the author of 14 books, including “Retirement Bites: A Gen X Guide to Securing Your Financial Future,” “In Control at 50+: How to Succeed in the New World of Work,” and “Never Too Old to Get Rich.” Follow her on Bluesky and X.
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Disclaimer : This story is auto aggregated by a computer programme and has not been created or edited by DOWNTHENEWS. Publisher: finance.yahoo.com
