The coronavirus pandemic has turned many Americans’ savings
and financial lives upside down, jolting many both physically and financially
in 2020. The accompanying economic downturn caused several industries to
temporarily shut down. Many businesses have struggled to open and stay open
under new safety guidelines.
While it may be a challenging time to save for retirement,
we are encouraged that many of us are saving for the future while shoring up
financial reserves.
The pandemic has forced all of us to take a long, hard look
at being prepared for the unexpected. When T. Rowe Price fielded its annual
Retirement Savings and Spending Study in June 2020, 60% of households who save
in 401(k) plans said the pandemic has affected their job or income, and almost
50% reported increased financial stress. Yet many of us have found resilience
in being resourceful. Going back to the basics of budgeting, saving for
emergencies, and even saving specifically for health care expenses has made a
comeback.
Increased Savings, Reduced Spending
The good news is that prioritizing short-term savings goals
hasn’t come at the expense of saving for retirement because the average 401(k)
contributions have held steady at 8%. In fact, approximately one-third of
401(k) savers cut spending since February in response to market events. The
temporary closure and reduced capacity of some businesses, coupled with
restrictions on travel, likely accounted for some of the reduced spending.
Others might have cut spending because of their loss of income.
Whether the drop in expenses was more circumstantial than intentional, 50% of
workers reported that managing and budgeting for daily expenses is a major
financial objective.
Reevaluating spending needs and developing a budget can help
meet short-term obligations while keeping longer-term savings goals on track.
This exercise will help as the economy gradually begins to resume prepandemic
operations and we reassess spending and saving priorities.
Financial Objectives Focus on Saving
Financial experts have long stressed the importance of
having an emergency fund that could cover three to six months of expenses in
case of a job loss, a decrease in income, or other financial shock. Keeping
this money on hand serves as the first line of defense so that individuals
aren’t tempted to withdraw from retirement savings.
Additionally, the reported increase in those saving for
retirement outside of an employer plan may indicate that while it’s important
to save for the future, being able to easily access the money is also
important.
Our survey, which was fielded during the pandemic, asked
401(k) savers what their major financial objectives were. Fig. 1 shows a
sizable year-over-year increase in the following areas:
- Saving for emergencies (50% up from 38% in 2019)
- Managing and budgeting for daily expenses (50%
up from 41% in 2019)
- Contributing to a health savings account (47% up
from 34% in 2019)
- Contributing to retirement savings outside a
workplace account (46% up from 37% in 2019)
Furloughed Workers Are in a Tough Spot
The survey also revealed a group of highly vulnerable
workers—the furloughed—who report higher levels of financial stress (62%). Nine
out of 10 people who were furloughed in 2020 said they are concerned about
losing their job. This group faces not only short-term financial challenges
(such as managing day-to-day expenses), but also uncertainty around their
financial future and retirement readiness.
Not surprisingly, 57% of furloughed workers now believe they
will need to change when they planned to retire because of the coronavirus
pandemic compared with 46% of other workers.
What May Lie Ahead
Looking forward, individuals seem committed to prioritizing
short-term savings for the next 12 months, as shown in Fig. 2. Both working and
furloughed individuals expect to increase their emergency savings as well as
continue to save outside of retirement accounts ahead of contributing to
retirement accounts within the next year.
Furloughed workers also foresee needing to withdraw from
their retirement accounts (potentially taking advantage of Coronavirus Aid,
Relief, and Economic Security (CARES) Act provisions, if eligible) or expect to
carry credit card balances more so than those who have not been furloughed.
Steps We Can Take to Address Financial Challenges
Before pausing retirement contributions, consider these
options when challenging financial circumstances arise.
- Stretch short-term available cash by cutting
expenses when possible. Discuss payment options with creditors for any
short-term relief options. If your spending patterns have changed, it may be a
good time to revisit your household budget.
- Use emergency reserves or other savings outside
of retirement accounts to help fund near-term expenses.
- Explore low-interest rate borrowing options
(e.g., home equity line of credit, refinancing a mortgage).
- Carefully weigh the pros and cons of retirement
account loans and withdrawals. While the CARES Act has relaxed some tax
consequences for those who qualify for coronavirus related withdrawals from
retirement accounts, accessing these funds now may be at the expense of
retirement readiness down the road.
- Avoid using high-interest credit cards. While we
may need to use credit cards for an unexpected expense or for a short time
period, using them in perpetuity for daily expenses can cause even more
long-term financial stress.
Confidence for the Long Term
We are all learning how to navigate our finances during this
unprecedented time. Many of us have been able to continue saving for
retirement, while some of us have had to rethink our financial priorities. It’s
OK to ask for help. Your employer or financial institution may have some
information and resources to help you get through a challenging period.
Securing your current financial situation may help you feel more confident in
the long run. Then, you can refocus on retirement planning once the uncertainty
of your situation subsides.
Click here for the
original article.