A Record Number of Americans Are Raiding Their 401(k)s. Here Is the Order of Operations That Stops It.

In 2025, 6% of workers in Vanguard 401(k) plans took a hardship withdrawal, pulling money out early to cover an emergency. That is a record, and it is the sixth straight year the number has climbed. More telling: nearly half of the people who tapped their account did it more than once. They were not handling a one-time crisis. They were using their retirement plan as a checking account.

The reasons are not mysterious. Median rent crossed $2,100 a month in early 2026, and a single emergency room visit can run $2,000 to $5,000 even with insurance. When the car breaks down or the deductible comes due and there is nothing in savings, the 401(k) is the only pile of money left to raid.

Here is the part that matters: the 401(k) is not the problem. The problem is what is missing underneath it. When the foundation is built in the right order, you almost never have to touch your retirement money early, and the penalties, taxes, and lost growth that come with it stop happening to you.

This is the order of operations we walk families through. It is simple, it works at any income, and it does not ask you to give up your employer match to do it.

Before the fix, it helps to see the true cost of an early withdrawal, because it is worse than most people realize. Pull money out of a traditional 401(k) before age 59 and a half and you typically pay three times:

• ◆A 10% early-withdrawal penalty on the amount you take.
• ◆Ordinary income tax on the full withdrawal, because the money went in pre-tax.
• ◆The permanent loss of compounding, which is the quiet one that hurts the most.

Run the numbers on a $10,000 withdrawal for a worker in the 22% federal bracket. The penalty and tax can take roughly $3,200 off the top, so $10,000 of retirement savings turns into about $6,800 in your pocket. That is the visible cost.

The invisible cost is bigger. That same $10,000, left alone for 25 years at a 7% average return, would have grown to roughly $54,000. So a $10,000 emergency did not cost you $10,000. It cost you a future $54,000. Do that a few times across a career, the way nearly half of these savers are doing, and you can quietly erase a decade of retirement progress.

The takeaway is not "never touch it." The takeaway is to build your money so you never have to.

Think of your finances like building a house. You do not hang the art before you pour the foundation. Money works the same way. Here is the sequence.

Step 1: Capture the full employer match. Always.

If your employer matches contributions, contribute at least enough to get every dollar of that match before you do anything else. A typical match is an instant 50% to 100% return on your money. Nothing else in this article, or anywhere in finance, reliably pays that. Skipping the match to chase any other strategy is a mistake. Keep this running the entire time you do everything below.

The match is the one part of a 401(k) that no other vehicle can replicate, which is exactly why we never tell anyone to walk away from it.

Step 2: Build a fully funded emergency fund.

This is the step almost everyone skips, and it is the direct cause of the record withdrawals in the news. An emergency fund is three to six months of expenses kept in a separate, liquid, boring account that you do not invest and do not touch except for true emergencies.

Why separate and liquid? Because the entire point is that when the transmission dies, you have somewhere to go that is not your 401(k). An emergency fund is what stands between a $1,500 car repair and a $54,000 hit to your retirement. It is not exciting, and it is the highest-leverage financial move most families can make this year.

Start with a starter fund of $1,000 to $2,000 while you knock out the next step, then build it to the full three to six months.

Step 3: Clear high-interest debt.

Credit card balances at 20%-plus interest are an emergency of their own. Once you have your starter emergency fund and your match, attack high-interest debt aggressively. Paying off a 22% credit card is a guaranteed 22% return, which beats almost any investment on a risk-adjusted basis. Then finish funding the emergency fund to the full amount.

Step 4: Supplement beyond the match, with the right mix.

Now, and only now, the foundation is solid: you have free money from the match, a cushion so emergencies never touch your retirement, and no high-interest debt dragging you down. This is where you build real long-term wealth, and where having more than one bucket pays off.

Two vehicles do most of the work here, and for most families the answer is to use both.

A Roth IRA. After-tax money goes in, and it grows and comes out tax-free in retirement. The trade-offs to know: the 2026 contribution limit is $7,500 ($8,600 if you are 50 or older), and eligibility phases out at higher incomes (around $150,000 for single filers, $236,000 for married filing jointly, where the phase-out begins). For a lot of households, the Roth is a strong, low-cost foundation for tax-free retirement income. A useful feature for the emergency-fund conversation: your Roth contributions (not the earnings) can be withdrawn without penalty, so a Roth can double as a deep backup reserve once it is established.

A properly structured indexed universal life (IUL) policy. This is the piece many families have never had explained to them clearly. An IUL is permanent life insurance with a cash value that grows linked to a market index, with a floor (often 0%) that protects it from market losses and a cap that limits the upside. Structured for cash accumulation, it adds three things the 401(k) and even the Roth do not all offer together:

• ◆No IRS contribution limit and no income phase-out. If you earn too much for a Roth or you have already maxed it, an IUL keeps going.
• ◆Tax-free access to the cash value via policy loans, with no 59 and a half age gate. That is the direct antidote to the hardship-withdrawal trap: a pool of money you can reach in a pinch without a 10% penalty and without a tax bill.
• ◆Principal protection. A 0% floor means a bad market year credits zero, not a loss, so the money you are counting on does not get cut in half right before you need it.

Used together, these create tax diversification (some money taxed now, some never), and they create liquidity so a future emergency lands on accessible cash, not on your retirement accounts.

Step 5: Then max what is left.

Once the match, emergency fund, Roth, and a properly structured policy are in place, additional 401(k) contributions beyond the match, an HSA if you qualify, and taxable brokerage investing all make sense. By this point you are building wealth from a foundation that does not crack the next time life happens.

Balance matters here, so a few straight-talk notes:

• ◆Do not skip the match for any of this. The match comes first, full stop.
• ◆An IUL is not a substitute for the emergency fund. It is a long-term vehicle, and a real cash cushion in a liquid account still comes first. The policy's cash value is a powerful secondary reserve and a supplemental tax-free income stream, not your first $10,000.
• ◆Structure is everything with an IUL. A policy built for maximum cash accumulation behaves completely differently from one sold for a large death benefit. Ask for a side-by-side illustration with conservative crediting assumptions, not a sales sheet.
• ◆This is sequencing, not either-or. The goal is to keep your 401(k) invested and untouched by building the layers that protect it.

You do not have to do everything at once. You have to do it in order.

• ◆Confirm you are getting the full employer match. If you are not, fix that today. It is free money.
• ◆Open a separate account and start the emergency fund. Even $50 a paycheck begins the buffer that keeps your retirement money safe.
• ◆Map your supplement strategy. Once the foundation is set, decide how a Roth IRA and a properly structured IUL fit your income and your goals, so your retirement savings have more than one leg to stand on.

A record number of Americans are pulling from their future to pay for their present. The fix is not working harder or earning more. It is building the layers in the right order so that when life happens, and it will, your retirement stays exactly where it belongs: invested, compounding, and working for the future you are building.

All Financial Freedom helps families build that foundation in the right order, including how a properly structured IUL can work alongside your 401(k) and Roth IRA rather than replace them. Schedule a free strategy call and we will map your order of operations together.

• ◆CBS News, A Record Share of Americans Are Taking Emergency Withdrawals From Their 401(k)s: cbsnews.com
• ◆World Economic Forum, Americans' Retirement Accounts and Hardship Withdrawals Hit New Highs: weforum.org
• ◆Employee Benefit News, Early 401(k) Withdrawals Threaten Retirement Security: benefitnews.com
• ◆Internal Revenue Service, Hardships, Early Withdrawals and Loans: irs.gov
• ◆Internal Revenue Service, 401(k) Plan Hardship Distributions, Consider the Consequences: irs.gov
• ◆Insurance Geek, IUL Tax Benefits: The Triple Tax Advantage Explained: insurancegeek.com
• ◆Insurance Geek, 7702 Plans: Tax-Free Retirement Income Explained: insurancegeek.com