It’s an open secret that most Americans are not saving enough for retirement. But it turns out that financial insecurity is not just something that looms a decade or two away, once a person’s career winds down.
In reality, many adults are just one financial setback away from hardship. According to the Federal Reserve, four in ten U.S. households would struggle to cope with a $400 unexpected expense. Without emergency savings, many people turn to high-cost options like payday loans designed to trap them in a cycle of debt. Others may pay hefty penalties and taxes to tap into their retirement savings early, undermining their future financial stability.
Research by the AARP Public Policy Institute finds that age does little to buffer against the financial pain of the unexpected. While older adults tend to have more in savings, about a third of working people between 50 and 64 years old have liquid savings of less than $2,000—the cost of a typical financial shock, according to a survey by the Pew Charitable Trusts.
What if there were a way to make saving for emergencies easier, even automatic? In fact, such solutions are surfacing.
One place thought leaders including experts at AARP have begun to look to for inspiration is employer-based retirement plans, such as 401(k)s. To help people save for emergencies, a small portion of employees’ paychecks could go directly to a savings account in their name in the form of recurring payroll contributions. This type of “set it and forget it” design works well in payroll-deduction retirement savings plans because the savings is whisked away to the 401(k) before the employee is tempted to spend it. Employers could even consider offering a financial incentive, such as a 401(k)-style match, for employees who contribute to their emergency savings accounts.
The account would differ from a 401(k) in a key way: accessibility. When employees encounter an unexpected expense, they could access their savings quickly with no fees or penalties for withdrawing. They’d also have complete control over the account and could change their contribution amount or stop contributing at any time.
Taking another page from the 401(k) playbook could increase the effectiveness of emergency savings programs. Employers could make saving for emergencies the norm by automatically enrolling employees into the program unless they choose not to participate. Automatic enrollment in retirement plans has boosted participation rates by 50 to 67 percentage points among eligible employees, strong evidence that people tend to stick with defaults.
Of course, a workplace emergency savings program would only be effective if employees actually use it. A recent survey by the AARP Public Policy Institute indicates that they would. The survey, which was nationally representative, finds that seven in ten employees would welcome a payroll-deduction emergency savings program in their workplace.
Notably, the survey found that age is not a strong predictor of whether employees would participate in an emergency savings program. Neither is income. Instead, stress about finances and confidence about the future tend to drive employees’ interest in an emergency savings program. Workers told AARP that a program like this would make it easier to save and would help lower their stress about coping with inevitable financial setbacks.
To see full survey results and to learn more about payroll-deduction emergency savings programs, visit aarp.org/FinForum.