Financial Shocks Hurt Americans' Retirement Savings

A research report says health crises, job losses or other life transitions lead retirement plan participants to pull money from their accounts or discontinue contributing.

Ninety-six percent of Americans experience four or more income disruptions—a reduction of 10% or more of their income due to health crises, job losses or other life transitions such as divorce—by the time they are 70, according to new research from The New School, commissioned by the National Endowment for Financial Education (NEFE).

This is one of the reasons why Americans are not saving enough for retirement, according to The New School. In fact, Americans on average are only saving about one-third of the amount they will need to maintain their living standards in retirement, according to NEFE.

“The story is more nuanced than simply saying Americans are failing at retirement savings,” says Ted Beck, president and CEO of the National Endowment for Financial Education. “No one likes to believe that income shocks will happen to them. Yet this research shows that it is not a matter of if something will disrupt earnings, but when and how severe the effects of such shocks will be.”

The study also found that men between the ages of 55 and 61 have $11,000 to $47,334 more in retirement savings than their younger counterparts. The range depends on their income level. The study also found that African-American workers have, on average, $16,977 less saved than their white counterparts, while Asians have $11,743 to $41,979 less saved and Hispanics have $8,280 to $24,278 less.

Those in the middle- and lower-income groups are more likely to experience economic shocks from job loss or poor health, and they are more negatively affected by these earnings losses.

The most negative impacts on income disruption are due to a decline in health, including long-term illness and a disability that impedes a worker’s ability to perform their job. When workers face such challenges, The New School says, they often withdraw money from their retirement accounts and/or stop contributing to the accounts. As the report’s executive summary notes, “Retirement plans often are treated as liquid savings during times of hardship. In fact, economic shocks explain at least 32% of withdrawals by workers in low-income households, and possibly considerably more.”

The National Endowment for Financial Education recommends that employers encourage workers to build an emergency savings account. The executive summary of the report, “Income Shocks and Life Events: Why Retirement Savings Fall Short,” can be downloaded here.