Why Retirement and Emergency Savings Need to Go Hand in Hand

Plan sponsors need to make sure workers keep both retirement savings and emergency savings as top-of-mind goals in order to prevent those without emergency savings from withdrawing money from their retirement accounts, experts say.

The importance of having emergency savings has been underscored since the outbreak of the COVID-19 pandemic, which caused many American workers to be laid off or have their pay reduced through scaled-back hours. In addition, LIMRA’s Secure Retirement Institute (SRI) found in a survey conducted last July that 29% of workers lacked an emergency savings fund, and even among those who had one, 59% said they would exhaust their savings before six months had passed.

Pete Welsh, head of retirement services for Millennium Trust, notes that before individuals can address their long-term financial goals, they need to address their short-term financial goals, including emergency savings, which is why emergency and retirement savings need to go hand in hand.

Yanela Frias, president of Prudential Retirement, says a survey her company conducted prior to the COVID-19 outbreak found that 63% of Americans did not have even $500 stored away for an emergency. As a result, Frias says, “Many have taken loans, hardship withdrawals or COVID-19-related distributions from their retirement plans, compounding the degradation of their retirement savings and causing many employers to worry if their workers will be able to retire on time. COVID-19 has highlighted the shortcomings of the current approach, whereby employers do not address emergency savings. During the first three quarters of this year, 10% of plan participants took a loan, hardship withdrawal or COVID-19-related loan from their retirement account. We know that emergency savings is a very important concept because, often, the retirement plan is the only source of savings Americans have. When they withdraw money from their retirement account, it directly impacts their ability to retire, and the money may never be replaced. An in-plan emergency savings account can be a source of liquidity when an individual faces a crisis, preventing them from taking money out of their retirement account.”

After the pandemic erupted, Prudential Retirement surveyed plan sponsors about emergency savings accounts and found that 23% of those that don’t already offer one intend to include automatic emergency savings as one of their benefits, Frias says.

Alison Salka, senior vice president and head of research at LIMRA, says a survey her organization conducted among plan sponsors showed that 70% are concerned how COVID-19 has weakened the retirement readiness of their workers.

“Consumers need to be able to deal with short-term, unexpected emergencies as well as long-term goals, most notably, retirement,” she says. “A good savings mindset prioritizes the creation of a safety net of funds and then a series of other goals that lead to long-term financial security. Payroll deduction is a great and easy way to help people save. Emergency savings accounts at the workplace are particularly important, given the economic fallout from the pandemic. Since the pandemic began, 14% of consumers we surveyed lost their job. In addition, 32% earned less income due to decreased hours or reduced pay. Forty-five percent of workers indicate the pandemic’s economic downturn has negatively affected their retirement. If employees have emergency savings in place, then they can avoid raiding their retirement accounts.”