401(k) Savings Rate Steady, But Short-term Savings Takes on Added Priority

Despite the many financial challenges brought on by the global pandemic, the good news is that saving for retirement continues to be a priority. 

According to findings from T. Rowe Price’s 6th annual Retirement Savings and Spending survey, the average 401(k) savings rate has remained constant since 2019 at 8%. 

The survey, which focuses on the financial attitudes and behaviors of 401(k) savers, also saw sizeable year-over-year increases in several other major financial objectives identified by 401(k) savers, including:

• saving for emergencies (50%, up from 38% in 2019);
• managing and budgeting for daily expenses (50%, up from 41%); and 
• contributing to a health savings account (47%, up from 34%).

Yet, while this behavior is positive, the financial challenges are also evident. Nearly 50% of survey respondents reported increased household financial stress, and 60% said the pandemic has affected jobs or incomes in their household. What’s more, nearly a third (32%) of respondents have cut spending since February in response to the market uncertainty and 45% (up from 33% in 2019) have considered delaying their retirement.

In the survey’s corresponding report, the authors note that temporary closures and reduced capacity of some businesses, coupled with restrictions on travel, likely accounted for some of the reduced spending, while others might have cut spending because of their loss of income. Still, whether the drop was more circumstantial than intentional, 50% of workers reported that managing and budgeting for daily expenses is a major financial objective, note authors Sudipto Banerjee, Vice President of Retirement Thought Leadership at T. Rowe Price, and Judith Ward, Vice President and Senior Financial Planner at the firm. 

“While it may be a challenging time to save for retirement, it’s encouraging to see that many individuals are continuing to save for their future while shoring up financial reserves,” says Ward. She adds that getting confident about short-term financial goals can allow savers to refocus on retirement planning once the uncertainty of their situation subsides.

Financial Challenges

Not surprisingly, the survey also revealed that furloughed workers report even higher levels of financial stress (62%). Nine out of 10 people who were furloughed in 2020 said they are concerned about losing their job. 

Banerjee and Ward note that 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. Nearly 6 in 10 (57%) 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.

Short-term Savings

Looking forward, the authors note that individuals seem committed to prioritizing short-term savings for the next 12 months. 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. For example, over the next 12 months, 401(k) savers anticipate increasing:  

• emergency savings balance (40%);
• savings outside of retirement (35%); and 
• contributions to retirement accounts (31%).

According to the authors, the reported increase in those saving outside of an employer plan may indicate that while it’s important to save for retirement, being able to easily access the money is also important. Furloughed workers also foresee needing to withdraw from their retirement accounts—potentially taking advantage of CARES Act provisions, if eligible—or expect to carry credit card balances more so than those who have not been furloughed.

Banerjee and Ward suggest that, before pausing retirement contributions, individuals should consider other options when difficult financial circumstances arise, including:  

• Cutting expenses, discussing payment options with creditors for any short-term relief options and revising their household budget if spending patterns have changed. 
• Using emergency reserves or other savings outside of retirement accounts to help fund near-term expenses. 
• Exploring low-interest rate borrowing options (e.g., home equity line of credit, refinancing a mortgage). 
• Weighing the pros and cons of retirement account loans and withdrawals, including whether accessing these funds may be at the expense of future retirement readiness.  
• Avoiding the use of high-interest credit cards. 

The online survey was conducted June 5–24, 2020 by NMG Consulting on behalf of T. Rowe Price. It included a sample of 3,420 retirement plan participants, 631 individuals without access to workplace savings plans, and 190 furloughed participants. It also included 1,007 retirees who have retired with a Rollover IRA or left-in-plan 401(k) balance.