As these programs disappeared, though, so has that savings cushion—and with it, nearly two-thirds of Americans report they’re living paycheck-to-paycheck as of December 2022. The number of U.S. adults who said they have no money left over at the end of December is nearly back to pre-pandemic levels.

Inflation may be cooling, but that doesn’t mean everyday prices on consumer goods are suddenly dropping. Instead, the heavy toll of today’s cost of living is still eating into Americans’ monthly budgets—and it’s also forced many to break into their metaphorical piggy banks, including their retirement accounts. 

The average 401(k) participant’s contribution rate dropped from 6.6% of their income in 2021 to 6.4% in December 2022, according to Bank of America’s 401(k) Participant Pulse report released Wednesday. It’s a sign that Americans are more concerned about short-term financial needs right now, according to the bank’s analysis. 

Americans are also taking money out of their retirement accounts via loans and withdrawals. Nearly 61,000 of the more than 3 million plan participants Bank of America tracks borrowed from their 401(k) last year, while about 12,350 took withdrawals. 

Millennials and Gen X are borrowing heavily from their 401(k)s

Millennials and younger Gen Xers are driving borrowing from retirement funds: Those ages 30-49 initiated more than half of loans taken against 401(k) balances last year, the bank finds. That makes sense considering these years tend to see Americans shelling out for homes and costs associated with raising a family like childcare and education.

Different employers and plan providers have different rules about 401(k) loans. But if an employer allows this, the maximum amount Americans can typically borrow is up to $50,000 or 50% of a worker’s vested account balance—whichever is less. If the total vested balance is less than $10,000, an eligible worker can borrow up to a balance of $10,000. 

Workers who take out a loan usually don’t have to pay any withdrawal penalties or taxes, but it’s a loan—so they do have to pay back the amount. This can be challenging if a worker leaves a job while repaying a loan because, depending on the plan rules, the total amount generally needs to be repaid immediately or the individual risks getting nailed with penalties and taxes.  

While the amount of money coming out of retirement accounts may be slowing, repaying those funds isn’t getting any easier. Among the 3 million plan participants analyzed by Bank of America, about more than $450 million worth of 401(k) loans—or about 15.9%—were in default as of December 2022. That’s up slightly from the third quarter, when 15.7% of loans were in default. When looking across generations, Gen X (ages 43 to 58) had the largest segment with their loans in default.

Americans are still dipping into their 401(k)s, but not as much as they used to

There’s typically a 10% penalty on any funds withdrawn from a traditional 401(k) before age 59½. But recent rule changes have made it easier to avoid this penalty (most plan providers typically withhold about 20% of the withdrawal amount for taxes). Americans can avoid the 10% penalty, for example, if they qualify for a hardship withdrawal because of medical bills or to avoid foreclosure or eviction. But the penalty is also waived for new parents seeking up to $5,000 in funds or for those buying a house or paying for college expenses. 

But the steady stream of money out of retirement accounts seems to be slowing. The number of 401(k) participants taking money from their retirement savings declined during the last three months of 2022. The number of Americans taking out 401(k) loans is down 12% from the third to the fourth quarter of 2022—and the average loan among was $7,500, the lowest average seen last year, according to Bank of America’s analysis. 

When it comes to withdrawals, the average amount in the fourth quarter was $4,700, which is about 8% less when compared to the third quarter, the report found. Cooling inflation is almost certainly a factor but the slowdown in the housing market likely plays a role. Even pre-pandemic, more than half of Americans dip into retirement funds for down payments on their homes.

On the bright side, Bank of America found that millennials—despite the many financial challenges facing this generation—are leading the way in savings rates. Nearly half of this generation (ages 27 to 42) contribute 7% or more of their income to their 401(k). That’s a higher percentage than any other generation, according to the bank’s report. 

The current economic environment is affecting consumers’ long-term financial health and planning, Lorna Sabbia, head of Bank of America’s retirement and personal wealth solutions division, said in a statement. “Long-term retirement planning is a critical metric when considering an individuals’ financial well-being, as well as the economy as a whole.”