Cracking the Retirement Nest Egg

Why can't Americans save more for retirement? That's the question asked by the Federal Reserve Board in an analysis of early withdrawals from retirement accounts. Perhaps early withdrawals are the problem, the Fed researchers suggest. We aren't saving much for retirement because we can't leave our nest eggs alone, cracking into them early—before age 59.5. Taking an early withdrawal from a retirement account is something most people would prefer to avoid because the money withdrawn is taxable and a 10 percent penalty is levied on it as well. Given these disincentives, it is reasonable to assume (and the Fed researchers show) that those who take early withdrawals are experiencing financial hardship. But how common is it to crack open the nest egg?

By examining tax returns, the Fed researchers estimated the frequency of early withdrawals from retirement accounts and their size relative to retirement contributions. Both figures are disturbingly large. Among taxpayers under age 55 with a retirement account in 2010, nearly one in four (23.8 percent) took an early withdrawal. To determine whether the effects of the Great Recession were behind this high rate of withdrawal, the researchers looked at rates in earlier years. Much to their surprise, early withdrawal was common well before the Great Recession. In 2004, 21.2 percent of retirement account owners under age 55 took an early withdrawal. In 2007, the figure was 22.2 percent.

Relative to retirement contributions, early withdrawals loom large. In 2004, early withdrawals from retirement accounts accounted for 30 percent of contributions made that year. By 2010, the figure had grown to 45 percent. With nearly half of our retirement contributions being withdrawn early, it's no wonder our nest eggs aren't growing.  

Source: Federal Reserve Board, Finance and Economics Discussion Series, Early Withdrawals from Retirement Accounts During the Great Recession, Robert Argento, Victoria L. Bryant, and John Sabelhaus, 2013-22