Financial Planning, Retirement

Near-Term Expenses Can Influence Savings Behavior

8/6/20 12:00 PM

Around one in five Americans are contributing less to their retirement accounts now than prior to the coronavirus outbreak, according to a recent Bankrate survey. Many of these people likely stopped setting money aside for old age because they lost their job as a result of the lockdowns, but 22 percent of respondents who were able to stay employed this crisis said that they had still halted their retirement plan contributions, and several admitted that they were even reducing their rate of saving prior to the pandemic.

This agrees with a pre-COVID Bankrate poll which found that a fifth of U.S. adults were already only setting aside 5 percent or less of their annual income for retirement and emergencies each year. When asked why they were not saving more money, the most frequently cited excuse was “expenses.” Similarly, a Boston College study found that future financial security too often winds up taking a back seat to more immediate money issues. Specifically, the correlation between surveyed U.S. workers’ personal financial assessments and their day-to-day financial troubles, e.g. difficulty covering regular bills, was significantly higher than with long-term issues such as retirement readiness. In other words people tend to give more weight (value) to their ability to meet near-term outlays when gauging their overall financial well-being.

This could result in situations where the satisfaction or sense of accomplishment people have from simply being able to cover their monthly expenses causes them to sometimes underestimate the importance of saving and other forward-focused financial behavior. Moreover, a Natixis poll found that 51 percent of Americans said they would agree with the statement “I need my money today,” and 37 percent admitted that they had already withdrawn funds from their retirement account. Thirty-eight percent of these respondents said that they tapped into their long-term savings early for a financial “emergency,” and the above-mentioned Bankrate survey similarly found that half of recently unemployed Americans had tapped into their retirement funds as an immediate source of income during the economic disruptions caused by the coronavirus and related containment efforts.

Such behavior can be understandable when experiencing a financial shock, but it should also be used as a last resort in order to avoid derailing one’s retirement preparedness, especially considering how much more costly achieving a comfortable and financially secure lifestyle in old age appears to have become. Participants in the Natixis survey, for instance, on average said that they expect they will need at least $805,000 to fund roughly 23 years of retirement. On the bright side, it is never too late to improve one’s savings habits, and every little bit of extra money that can be set aside helps. We looked at a few examples of this last month and a similar analysis from Fidelity Investments estimated that a hypothetical 25-year-old could gain a “whopping $100,464 of extra retirement income” simply by contributing another $33 to his or her 401(k) account each month.

To make forming good savings habits easier, and bad habits more difficult, Bankrate’s Greg McBride in a separate note suggested that “The most effective method to save more money is to do so automatically. Set up payroll deductions that go directly from your paycheck into a dedicated online savings account for emergency savings and a workplace retirement plan or an IRA for retirement savings. Save it before you get the chance to spend it.”



Sources: Bankrate, Boston College, NGAM

Post author: Charles Couch