For decades, the rule of retirement planning was simple: contribute to your 401(k) first, sort out the rest later. That mantra built trillions in nest eggs. It turned tax-advantaged accounts into America’s default wealth-building machine.

Now that rule is crumbling. Workers are dialing back contributions, pausing entirely or tapping accounts early.

The trade-off has shifted from a lifestyle choice to something more urgent. It now pits rent, groceries and mounting debt against any hope of a comfortable retirement.

What the numbers say in early 2026

The data tells two stories at once. On one hand, the IRS raised the 401(k) contribution limit to $24,500 for 2026, up from $23,500 in 2025. Vanguard’s annual report found that average savings rates hit a new all-time high in 2024, and 45% of participants increased their deferral rate. Those are encouraging signs.

On the other hand, hardship withdrawals are surging. In the most recent full-year data available, nearly 6% of employees took a hardship withdrawal from their retirement account, up from 2.7% in 2018.

Retirement plan loans have risen from 6.5% to 9.2% since 2021, per PSCA. And only 35% of non-retirees feel on track for a comfortable retirement, per the Federal Reserve‘s May 2025 report.

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More than one-third of U.S. adults have already delayed retirement or plan to, per New York Life. The top two reasons cited: not enough savings and inflation.

Hardship withdrawals come with real pain. Early withdrawals trigger income taxes plus a 10% penalty for those under 59 and a half. A worker skipping a 4% employer match on a $60,000 salary forfeits $2,400 every year. That gap compounds into a significant retirement shortfall over time.

Why workers are being squeezed in 2026

Three forces are colliding right now.

First, costs keep climbing. Headline inflation has cooled to around 3%, but shelter and insurance costs climbed far faster. Tariffs introduced in early 2026 are now pushing up prices on imported goods, from cars to clothing, adding fresh pressure to household budgets that were already stretched thin.

Second, job security is fragile. Challenger reported 1,206,374 U.S. job cuts in 2025. That is the highest annual total since 2020 and a 58% jump from 2024. White-collar roles are increasingly contract or freelance. Irregular income pushes families to build cash cushions rather than make long-term retirement bets.

Third, debt is suffocating. Credit card balances hit $1.28 trillion in Q4 2025, with average rates near 23.77%, per the New York Fed. Auto loan balances reached $1.67 trillion. Student loan delinquencies have surged to nearly 25% of borrowers with payments due, up from 9% before the pandemic. For stretched households, 401(k) contributions are the only flexible line item left.

The emotional weight behind the decision

Numbers capture the trend. Emotion drives the decisions. Employers auto-enroll workers at 3 to 6%. Yet pausing that direct deposit feels like betraying your future self.

Workers describe guilt and quiet rationalization. “I’ll ramp up later” becomes the default. Once the car is paid off. Once the kids finish college. That postponement has a name in behavioral economics: present bias. Today’s certainty wins over tomorrow’s probability.

Photo by Cn0ra on Getty Images

Research shows workers who cut contributions during financial stress rarely fully recover. Five years later, many still save below target rates. The promise of catching up collides with the next emergency: a medical bill, a home repair, a layoff. And the 2026 contribution limit of $24,500 means little to a worker who cannot cover this month’s rent.

What this means for workers and the system

These choices ripple across decades. Workers saving meaningfully less face real shortfalls at retirement, per EBRI models. That gap forces harder trade-offs later: delayed retirement, part-time work or leaner lifestyles. Women and lower-wage earners suffer most.

The broader system feels it too. Social Security faces projected shortfalls by the mid-2030s. A generation with thinner nest eggs will lean harder on public programs already stretched by an aging population.

Relief exists on paper. SECURE 2.0 allows penalty-free emergency withdrawals of up to $1,000 annually. Employers can offer 401(k)-linked emergency savings accounts. But as of early 2026, employer adoption remains minimal. The tools are there. They are just not reaching the workers who need them most.

Workers trading 401(k) dollars for today’s stability are not making a bad decision. They are making the only decision they can. Savings rates will rebound when wages outpace costs and jobs stabilize. Until then, the 401(k) is playing a role it was never designed for, and neither workers nor the system is built to handle it.

Related: The surprising reason workers are cashing out 401(k)s early