Suze Orman is warning workers not to raid their retirement accounts to cover emergency expenses, calling it a big and costly mistake to do so.
The high-profile personal finance expert has also revised her thinking on emergency savings—and now says Americans need significantly more of it. She used to think setting aside enough to cover three to six months of expenses was good enough, but now says everyone should have enough emergency savings to cover eight to 12 months.
Last week, Orman spoke at a webinar hosted by the Bipartisan Policy Center and the Funding Our Future coalition, advocating for the expansion of emergency savings programs. The event also included Senators Cory Booker (D-NY) and Todd Young (R-IN), who are co-sponsors of legislation that would allow employers to automatically enroll employees in “sidecar” emergency savings accounts.
Orman stressed that while many Americans have savings accounts they use for vacations or luxury items, what they need even more is an account strictly for emergencies, such as when their car needs to be repaired or an unexpected medical expense arises.
Without such an account, people are tempted to put things on credit cards and make minimum payments—or raiding their 401k or other retirement savings accounts.
“Unless it is a separate account that actually is funded directly from a paycheck, they never, ever will do it on their own. Unless employers help employees start to do that, we’re heading downhill really fast.”
Suze Orman
“We don’t want a situation where something happens and they need money, they go to their 401ks or 403bs or TSPs [Thrift Savings Plan] to take out a loan. That will be one of the biggest mistakes they make, but yet that is where they go for emergency money,” Orman said.
“The majority of Americans, in my opinion, barely have the money today to pay for their everyday expenses. Unless it’s separated for them, unless it is a separate account that actually is funded directly from a paycheck, they never, ever will do it on their own,” Orman said. “Unless employers help employees start to do that, we’re heading downhill really fast.”
She emphasized that people need that separate emergency savings account to keep them from making costly financial mistakes. A Bipartisan Policy Center survey conducted in February found that one-third of working adults feel somewhat or very uncomfortable about their ability to pay an emergency $400 expense.
“What they need is another place they can go when their car breaks down or something. Not their retirement account but their emergency savings account. That’s why the two have to be separated and that’s why employers need to get involved in this because most people won’t save money unless their employer somehow does it for them through a payroll deduction,” she said.
BPC Director of Economic Policy Shai Akabas, who interviewed Orman for the webinar, added that research shows contributing to an emergency fund doesn’t hurt their ability to contribute to a retirement account.
“We see a lot of evidence that when people have those emergency savings funds, it actually protects their retirement savings,” Akabas said. “So it’s additive, not replacing the amount that they’re putting into retirement accounts.”
Orman does have a vested interest in expanding emergency savings account access, as she co-founded fintech company SecureSave during the COVID pandemic to help employees set up automatic contributions to emergency funds that are matched by their employers.
Booker, Young push provision in SECURE 2.0
Senators Booker and Young used the webinar appearance to stump for the inclusion of the emergency savings provision in the SECURE 2.0 retirement reform package currently being finalized in Congress.
The provision would allow employers to automatically enroll their workers into an emergency savings account alongside a retirement account is a reform that aligns with a recommendation in the Bipartisan Policy Center’s 2016 Commission on Retirement Security and Personal Savings.
The optional “sidecar” benefit would be offered in combination with a 401k. Employers could automatically enroll employees into the emergency savings account with up to 3% of salary, with the account being capped at $2,500 or lower. Employee contributions to the emergency savings account would be treated as elective deferrals, and matching contributions from employers would be made to the 401k plan.
The provision, taken from the Emergency Savings Act of 2022, was included in the RISE & SHINE Act passed by the Senate HELP Committee back in June, one of the bills forming the basis of SECURE 2.0.
“This is a very smart thing to do,” Booker said. “I think this is a common-sense, low-hanging fruit way to allow people to be insulated from what is increasingly becoming a tough world for the average worker.”
“Our effort here if we can get this to work—and we think we will get sufficient support to do so—is to ensure that every American, regardless of their employer’s retirement benefit provision, will have an opportunity to benefit from this emergency savings effort,” Young said.
SEE ALSO:
• Recordkeeper Adds Suze Orman’s Emergency Savings Tool
• Draft Legislation to Strengthen Retirement and Emergency Savings Introduced
• Senate HELP Committee Advances RISE & SHINE Act
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.