Everyone should save for retirement - that is a mantra we have all heard endlessly.
But for many people, saving for retirement actually should be fairly low on the financial priority list - well behind the more immediate goals of building a rainy day fund and reducing their consumer debt.
That is evident in new research by the Pew Charitable Trust examining causes and impacts of financial shocks that hit Americans. A Pew survey of more than 7,800 households found that most households have failed to build enough liquid savings outside retirement accounts to respond to emergency needs.
Sixty percent of households experienced a financial shock in the past 12 months - typically lost income due to unemployment, illness, injury, death or a major home or vehicle repair. The financial setbacks affect people of all ages and racial groups, although shocks disproportionately affect younger and minority households.
However, even higher-income workers grapple with the problem. Thirty-five percent households earning more than $85,000 reported a financial shock in the past year.
When income shocks come along, lower-income households - those with income below $25,000 - have enough savings to replace only six days of household income, Pew found. Households with more than $85,000 can replace just 40 days of income from savings.
Seeking Balance
“We don’t talk enough about the balance people need to strike for themselves between consumption, preparing for the short-term and preparing for the long term. All three are important,” said Clinton Key, research officer with Pew’s financial security and mobility project.
Another sign of imbalance: a sizable share of financially stressed households also are saving for retirement, according to Pew. Thirty-five percent of households with no liquid saving said that they do own a retirement account.
These accounts often are used as emergency funds - 23 percent of workers have taken a loan or early withdrawal from their retirement savings, according to a 2015 survey by the Transamerica Center for Retirement Studies. But withdrawals from IRAs and 401(k)s by investors younger than 59-1/2 are subject to a 10 percent withdrawal penalty in most cases, plus any income tax that is due.