Financial Planning, Retirement

Short-Term Savings Can Help With Retirement Readiness

9/12/19 12:00 PM

/iStock-462756183.jpgHeading into 2019 we learned that the top financial resolution for Americans this year would be to boost their savings. For most individuals this means increasing the amount of money they regularly contribute to 401(k)s and other tax-advantaged retirement plans. It is encouraging to see that people recognize the importance of ensuring old-age financial security, and a new Bankrate poll found that 29 percent of working Americans have indeed increased their retirement saving in 2019. However, 46 percent of respondents indicated that the amount of money they are contributing to 401(k)s and IRAs this year is “about the same” as in 2018, and 16 percent even said that they are “saving less” compared to last year.

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One potential reason why so many Americans have yet to raise their long-term savings rate this year is because they are currently focused more on improving their short-term financial preparedness. That is probably a good idea since only half of U.S. workers have a rainy day fund that could cover three months of “expenses in case of sickness, job loss, economic downturn, or other emergencies,” according to recent Federal Reserve data. More alarming is a new Employee Benefits Research Institute analysis which estimated that of all U.S. families with a working head of household, only around one in five have enough cash or other liquid savings to meet at least three months of their typical income needs. Even if the emergency fund requirement is reduced to being able to cover just 75 percent of a family’s regular income needs for at least three months, only a quarter of working head of households have sufficient savings to meet this threshold.

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The study also found that families with a head of household who participates in a 401(k) or other defined contribution plan are significantly more likely to have adequate liquid savings than those with nonparticipating plan-eligible head of households (24.7% vs. 13.4%). A similar pattern was observed even after adjusting for differences in age and income, therefore further highlighting the important relationship between plan participation and both near- and long-term financial well-being. The study concluded that employer-provided initiatives to boost emergency savings can help “lead to better long-term results through a reduced need for early withdrawals (and tax penalties), and potentially higher contributions to a DC plan after an account for short-term financial issues is funded.” The report’s authors added that such savings programs “could be directly beneficial to workers and indirectly beneficial to employers through higher employee satisfaction.”

  


 

Sources: Bankrate, FRBG, EBRI

Post author: Charles Couch