Retirement security starts with emergency savings
A large percentage of Americans don’t have enough cash on hand to meet an unexpected expense. Consequently, many workers may need to tap into their 401(k) retirement accounts, which can cause “leakage” and affect their retirement goals.
Prudent fiduciaries should understand the state of emergency savings in America, and how it can affect their employees’ retirement plans.
Twin crises: financial unwellness and retirement unreadiness
Americans are unprepared for even a small financial emergency. For example:
- Forty percent would be unable to meet a $400 emergency expense, such as car repair or replacing a broken appliance, without borrowing1
- Twelve percent would be unable to pay the bill if they had a $400 emergency expense
- Almost one-third of adults are “either unable to pay their bills, or are one modest setback away from hardship”
Almost 20% of people, even some earning more than $100,000, reported that they “could not cover a $400 unexpected expense.”
The main reasons identified by researchers for lack of emergency savings are unstable employment, low educational attainment, and debt.
Until the immediate needs of those unable to save for emergencies are addressed, financially pressured Americans will struggle to build the wealth required to retire securely.
America’s retirement preparedness troubles are also well known:
- Nearly half of households aged 55 and older have no retirement savings
- Almost 30% have neither savings nor a pension
- About 50% of households are “at risk of not having enough to maintain their living standards in retirement”
The situation has also been referred to as a “retirement savings crisis.” Lack of a short-term savings account for emergencies may lead to under-saving for retirement and to premature use of retirement funds through loans and withdrawals.
For many financially strapped Americans, a 401(k) is a source of ready cash in the form of an account loan. Though sometimes believed to be innocuous because they’re repaid, 401(k) loans can endanger retirement security. Loan balances aren’t productively invested, depriving the borrower of potentially valuable returns.
Loans also have unintended negative consequences. We’ve found that 11% of 401(k) borrowers lower their contributions during repayment, and nearly half stop contributing altogether. Making matters worse, loan interest is paid with after-tax dollars, and is taxed again upon distribution in retirement.
An emergency for the employer, too
The benefits of helping employees prepare for emergencies go beyond improved retirement readiness. According to John Hancock’s Annual Financial Stress Study, more than half of workers are distracted on the job by financial matters. Financial stress harms productivity, hurting both employer and employee. We’ve found that not having enough retirement savings remains the top concern when it comes to future expenses, with nearly half saying they worry about this a great deal.
Financial stress leads to lower productivity, lower savings, and lack of emergency and retirement preparedness. The cycle is real—and hard to break.
But the cycle can also work in reverse. Workers offered financial wellness assistance are less likely to be worried about their overall financial situation; in turn, they’re relatively less concerned about not having enough for an emergency or for retirement, or about losing their job.
Breaking the cycle
Retirement plan providers are recognizing this, and are innovating to make emergency expenditure planning and savings services available as part of bundled recordkeeping offerings.
Fiduciaries concerned with addressing the root causes of under-saving and lack of retirement readiness can make these services, often labeled financial wellness tools, available.
The features that a sponsor can consider in an emergency savings tool include:
An expense calculator: Common emergency expenses should be suggested and quantified.
A savings planner: The funding of potential outlays should be scheduled and regular, allowing participants to save gradually, up to a goal amount.
An actionable, automated plan: Consider partnering with a service provider that offers systematic electronic transfers from an outside bank account to an FDIC-insured, low- or no-fee emergency savings account linked to the participant’s 401(k) homepage.
Measurable results: Tracking loans and hardship withdrawals, as well as use of wellness tools, are good ways to monitor results.
The “retirement savings crisis” and emergency savings problem can’t be separated. To fix the former, the latter should also be addressed. As financial wellness grows in importance, some plan sponsors are looking to their business partners—such as advisors and recordkeepers—for help.
A prudent fiduciary could consider adding an emergency savings solution as part of a retirement readiness program and monitor its usage to ensure effectiveness.
In June 2019, John Hancock sponsored our sixth annual Financial Stress Survey. Working with the respected research firm Greenwald and Associates, we surveyed more than 3,500 workers to learn more about individual stress levels, their causes and impacts, and strategies for relief.
The content of this document is for general information only and is believed to be accurate and reliable as of posting date but may be subject to change. John Hancock does not provide investment, tax, or legal advice. Please consult your own independent advisor as to any investment, tax, or legal statements made herein.
This communication does not include unbiased investment advice from John Hancock. In the event a plan you advise selects John Hancock as a recordkeeper, John Hancock and its sales professionals and other employees who assist in bringing retirement plan business to John Hancock and retaining business will receive compensation.
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 Board of Governors of the Federal Reserve System. “Report on the Economic Well-Being of U.S. Households in 2018 - May 2019.” https://www.federalreserve.gov/publications/2019-economic-well-being-of-us-households-in-2018-dealing-with-unexpected-expenses.htm
 Chen, Anqu. Boston College 2019. “Why are so many households unable to cover a $400 unexpected expense?” https://crr.bc.edu/wp-content/uploads/2019/07/IB_19-11.pdf.
 GAO. March 26, 2019. https://www.gao.gov/products/GAO-19-442R?utm_campaign=usgao_email&utm_content=topic_retirementsecurity&utm_medium=email&utm_source=govdelivery#summary
 Center for Retirement Research at Boston College 2019. “National Retirement Risk Index.” https://crr.bc.edu/special-projects/national-retirement-risk-index/
 Ghilarducci, Teresa. “Americans do not have enough retirement savings, really.” https://www.forbes.com/sites/teresaghilarducci/2019/03/28/no-americans-really-do-not-have-enough-retirement-savings/#1add3c2a2b21
 John Hancock internal data as of July 31, 2019.
 Sixth annual John Hancock Financial Stress Survey, 2019.