Mitigating 401(k) leakage with emergency savings

Despite an overall positive trend toward retirement readiness, Vanguard’s How America Saves 2025 revealed that roughly a third of participants cash out their savings when they leave their jobs, and some withdraw funds while still employed. This behavior can significantly impact long-term retirement outcomes.

Roughly 55% to 60% of those in Vanguard-administered plans are hourly workers, and those workers face nearly triple the income volatility of their salaried peers (Goodman, Hahn, and Greig, 2025; Ganong et al., 2024). On average, their monthly income, based on a median annual income of $64,000, can swing up or down by about 15%, while salaried workers see changes of about 5%. This instability makes hourly workers more likely to dip into their retirement savings unless they have a financial buffer. A recent Vanguard white paper, Emergency Savings Protect Retirement Savings, highlights the need for short-term savings solutions—particularly for hourly workers—to help cover unexpected expenses and support retirement goals.

“Many workers see their income change unpredictably from month to month. An emergency savings buffer can help households deal with volatility and preserve their 401(k) wealth for retirement,” said Vanguard economist Aaron Goodman. 

In 2024, we surveyed approximately 2,300 Vanguard 401(k) plan participants and asked how confident they were in their ability to cover a $2,000 emergency expense. 

The results were telling: Among those surveyed, 71% of salaried employees reported having access to liquid emergency savings, compared to 39% of hourly employees. And more importantly, those with emergency savings, regardless of whether they were hourly or salaried workers, exhibited much better savings behaviors by contributing more to their 401(k) accounts and taking fewer withdrawals both during and after leaving their jobs, even in an analysis that controlled for annual income, age, and employee tenure. This highlights the need for emergency savings solutions, particularly for hourly workers.

We found that participants with at least $2,000 in emergency savings:

• Contributed an additional 2.2 percentage points of income to their 401(k) accounts.
• Were 19 percentage points less likely to take a 401(k) loan.
• Were 17 percentage points less likely to take a hardship withdrawal from their 401(k).
• Were 43 percentage points less likely to cash out their 401(k).

These findings indicate that emergency savings can play a pivotal role in retirement success. Even a modest financial cushion can reduce the chance of an early withdrawal and help participants stay on track to reach their long-term financial goals.