Emergency Savings: A Step on the Road to Retirement Security

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In case on emergency, gently take from jar.

Employers have long been at the forefront of efforts to improve Americans’ retirement security. It’s a tough challenge for many reasons.

One is that it’s difficult to convince Americans who do not feel financially secure today to think about financial security tomorrow. When people are worried about paying the bills, funding retirement is rarely a priority.

Financial wellness programs often consist of basic financial education like budgeting, saving and debt management that ultimately address the top issues associated with financial stress, such as:

The lack of an emergency fund can have an impact for many households. Common financial wisdom holds that households should have at least three months of income saved for emergencies. It’s an amount that can keep an individual or family financially afloat in the event a job is lost or unexpected expenses occur.

Some have questioned whether three months is too much. That is most likely not the case.

While losing a job isn’t a frequent occurrence, most Americans experience smaller, unexpected expenses with relative frequency, such as missing days at work, home repairs, car trouble, funeral or wedding travel, or medical emergencies.

Chart source: “Survey: Most Americans wouldn’t cover a $1k emergency with savings. Bankrate.com. 

Few American households, regardless of income level, meet the standard of saving three month’s income.

In 2017, the Federal Reserve reported 41% of U.S. adults could not easily pay a $400 expense. And, a January 2019 Bankrate Financial Security Index survey found 60% of respondents could not pay a $1,000 expense.

Potential Government Involvement

Citing some of these statistics, several members of Congress recently introduced The Saving for the Future Act.

Spearheaded by Senators Amy Klobuchar (D-MN) and Chris Coons (D-DE), this new legislation would require businesses with more than 10 employees to contribute at least 50 cents (increasing with time and wages) into an employee savings/retirement plan for every hour an employee worked.

The bill estimates that companies would contribute more than $1,000 per year into workers’ savings accounts.

Some of the other notable features of the bill include:

Though it is uncertain if this sweeping legislation will advance, it shows how far the emergency savings conversation has advanced in a short time, as well as the continued national interest in retirement readiness.

Consider a payroll deduction savings plan

As lawmakers have taken notice of Americans’ struggle with short-term savings, so to has the private financial sector.

Employers that already offer financial wellness to employees could easily add an emergency savings account option to their existing benefit suite.

Employers would be wise to consider making emergency savings a part of their financial wellness programs, as heightened financial anxiety has a negative effect on workplace productivity.

According to research from John Hancock, financial anxiety can cost employers as much as $2,000 per employee per year.

In 2018, the AARP reported that 71% of employees were likely to participate in an emergency savings program through work. Employees favored programs with the following features:

Alternatively, employers could build an emergency savings option into their workplace retirement plans using after-tax 401k contributions or deemed Roth IRAs.

These options might allow automatic enrollment and matching contributions. However, plan sponsors would need to carefully consider issues related to:

Emergency savings programs can help employers achieve one goal of many financial wellness programs: reducing financial stress. When employees have enough money set aside for unexpected expenses or emergencies, they will have greater financial confidence.

Lowering financial anxiety has benefits for employers, too. It can improve employees’ health, reduce absenteeism, decrease turnover rates and increase workplace satisfaction. In addition, meeting short-term savings goals can free employees to save for longer-term goals, like retirement.

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