Has YOUR 401(K) shrunk? Average American's retirement balance falls 4% as more and more savers dip into their later life savings to make ends meet

Rampant inflation and ongoing economic uncertainty have caused the average American's 401(K) balance to plummet nearly 4 percent, new analysis shows.

Figures from Fidelity Investments, one of the largest US retirement plan providers, show the average 401(K) fell to $107,700 in the third quarter of the year, down from $112,400 in the second.

Individual Retirement Account (IRA) balances similarly fell to $109,600 from $113,800 in the same time period. 

A 401(K) is generally offered by an employer - and allows higher annual contributions - while an IRA is typically set up by an individual through a broker or bank and has more investment options.

Researchers noted the trend is in part being driven by an uptick in workers taking hardship withdrawals and loans from their 401(K)s. 

Despite the gloomy findings, retirement pots remain far healthier than they were a year ago, the report noted.

In the third quarter of 2022, the average 401(K) held $97,200 - $10,500 less than it has today.

Kevin Barry, president of workplace investing at Fidelity, said: 'Americans have become accustomed to riding the economic waves of the past several years, and this quarter is no different.

'They are learning how to stay afloat in very challenging financial conditions - including having enough money set aside should an emergency arise.'

The analysis also showed younger workers were investing more into their later life savings, specifically IRAs. 

The average IRA of a Gen Z investor - born between 1997 and 2012 - grew 63 percent in the last year, according to Fidelity. 

But researchers also observed an increase in hardship withdrawals from retirement accounts. In the third quarter of the year, 2.3 percent of workers took a hardship withdrawal - up from 1.8 percent in the three months before. 

Anybody wishing to dip into their 401(K) will be liable for income tax on the withdrawal. And if they do so before the age of 59 and a half, they have two options: they can either take a loan or a hardship withdrawal.

With the latter, a worker can only take it when they are in 'immediate and heavy financial need' such as an unexpectedly large medical bill. The amount must only be what's necessary to cover this need.

They are then slapped with a penalty worth 10 percent of the withdrawal. Some exemptions exist - for example, if it has been agreed under a qualified domestic relations order.

The rules around hardship withdrawals from IRAs are more flexible. Owners of these accounts can avoid the 10 percent penalty if the funds go toward: higher education expenses, a first home - though this is capped at $10,000 - unreimbursed medical expenses more than 10 percent of adjusted gross income, health insurance premiums while unemployed. 

Workers also have the option to take a loan from their retirement pots. With a 401(K), they have the option to withdraw either $50,000 or half the amount in your account - whichever is less - on the condition they repay it within five years. 

IRA owners do not have the option to take a loan from their accounts.

According to Fidelity, 2.8 percent of their 401(K) plan participants took a loan from their pot in the third quarter of the year, up from 2.4 percent in the same period in 2022. 

Because withdrawals are both costly and cause a dip to retirement savings Fidelity previously recommended households focus on building up emergency funds rather than relying on their retirement savings. 

A previous report from the provider read: 'Employees who have access to short-term savings when they need it are more financially confident, have higher financial wellness scores.'

Crucially, emergency funds must be highly liquid and allow households quick access to cash without forcing them to explore high-interest alternatives.

The Fidelity report comes after separate research from Goldman Sachs identified the four key traits workers need to build a healthy retirement nest egg.

Goldman Sachs Asset Management surveyed 5,261 US workers and retirees for the report. 

Researchers identified four characteristics in those with the best savings which include: high optimism, future orientation, financial literacy and reward orientation.

Yet only one in ten respondents had all four traits and 5 percent had 'suboptimal' characteristics meaning they had low optimism, future orientation, financial literacy and were risk orientated.