Hourly workers tend to cash out their retirement plan savings more frequently than salaried workers when they leave their job, according to a report from Vanguard. Early cash outs from defined contribution plans normally come with a 10% tax penalty, and far more often than not, represent a sub-optimal savings strategy.

About 33% of participants in Vanguard-administered plans took a cash-out when they left their jobs in 2023. This is consistent with data from the Employee Benefit Research Institute (EBRI), which shows that the percentage of workers who take a lump sum cash payout is generally in the high 20s to low 30s in any given year.

Lump sum cash outs are almost always a poor idea. It is typically better to rollover the money, keep it in the plan, or, if liquidity is needed, to file for a hardship withdrawal (which most workers taking cash outs don’t do).

However, these cash outs are more common with hourly workers than they are with salaried staff. Hourly workers “have cash-out rates 10-15 percentage points higher than salaried workers with similar annual incomes.”

Vanguard attributes this principally to income volatility.

“Participants with inconsistent paychecks are significantly more likely to cash out when they leave their jobs. Hourly workers often experience substantial monthly income volatility.”

The report explains that workers with higher income volatility often have greater liquidity needs and will, as a result, have a greater need for cash when they leave an employer.

This trend carries over to hardship withdrawals, too. The report states that “The annual hardship withdrawal rate is 2.2% for hourly workers and just 0.7% for salaried workers.”

The report identifies emergency savings as a key factor in reducing early cash outs.

“Emergency savings can improve workers’ financial resilience and help them weather volatility. Participants with $2,000 in emergency savings contribute more to their 401(k) accounts and take fewer withdrawals (both while working and after leaving their jobs) than participants who don’t have $2,000 in emergency savings,” the report explains.

Vanguard added that “Even when controlling for annual income, age, and employment tenure, emergency savings strongly predict retirement wealth accumulation.”

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