Regardless of income, American families do not appear to be prepared for short-term financial emergencies, which can have long-term implications on retirement savings, a new study suggests.
Among families with working family heads under age 65, fewer than a quarter had more than three months of their family income in liquid savings in 2019, according to “Emergency Savings: What Do Workers Have Available in Liquid Savings? How Long Can They Afford a Loss of Income?” by the Employee Benefit Research Institute.
In fact, EBRI found that the median family with a working head had less than one month of income in liquid savings available. Even families with incomes in the highest quartile are not in much better shape, according to the study, which found that their liquid savings stands at less than two months of income.
The study is based on data from the Federal Reserve’s most recent triennial Survey of Consumer Finances (SCF) survey, which includes the reported assets, debts and incomes of American families. The defined contribution plan status—participant or nonparticipant—of working family heads under age 65 and corresponding level of emergency savings is a key focus of the EBRI study.
DC Plan Comparison
While the presence of a DC plan did little to improve the situation, EBRI found that plan participation corresponded to an increased likelihood of having liquid savings across all age cohorts. Overall, the study found that 25% of families with a DC plan participant head in 2019 had more than the equivalent of three months of their income in liquid savings, compared with 20% of the families whose head was not a DC plan participant.
In looking at age cohorts, however, the difference was most pronounced among families with heads ages 35–44 and 55–64. While 25% of families with working heads ages 35–44 who were DC plan participants had liquid savings in excess of three months’ income in 2019, just 18% of those with heads who were not plan participants met this threshold.
Similarly, nearly 33% of families with working heads ages 55–64 who were DC plan participants had liquid savings of more than three months’ income in liquid savings, compared with 24% of families whose heads were not participants.
Race and Ethnicity
EBRI further reports that while families with white, non-Hispanic or “other” heads were much more likely to have liquid savings above the three-months’-income threshold than the families with black/African American or hispanic heads, the relatively low percentage of families that had liquid savings held regardless of race or ethnicity. As such, the need for emergency savings help is not limited to just families with low incomes or with younger heads, the study observes.
Among families with heads falling into the “other” category, 28% had liquid savings in excess of three months of their income, while 26% of families with white, non-Hispanic heads surpassed this threshold. Meanwhile, only 10.1% of families with black/African American heads and 12.3% of Hispanic heads had liquid savings in excess of three months of income.
For families with heads of each race and ethnicity, those with DC plan participants again were slightly more likely to have had liquid savings of more than three months of income than families with nonparticipant heads.
Emergency Savings Fund
The study suggests that no matter the age, income, or race and ethnicity, the pre-pandemic numbers show that many Americans were not ready for the prolonged economic impact of the pandemic. And while those participating in a DC plan were more likely to report having emergency savings surpassing the three-months’-income threshold than nonparticipants, a sizable share of DC plan participants still did not report such savings.
The ability to cover short-term financial needs can have long-term financial consequences, so establishing an emergency savings fund to protect against financial emergencies is important to overall financial health, the study emphasizes.
“Given the low percentage of families with sufficient savings to cover a loss of income for any extended period, it is understandable that more employers are seeking to address the overall financial wellness of American workers,” notes Craig Copeland, EBRI Senior Research Associate and author of the report. “From a public policy perspective, addressing short-term savings needs as a separate financial issue could lead to better long-term results, as emergency savings—distinct from retirement savings—could help preserve assets in DC plans that otherwise might be tapped for emergencies.”
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