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Facing increasing financial pressure to cover basic household bills, nearly a third of workers tapped into their retirement savings over the past 12 months to pay for short-term expenses, according to a report by Betterment at Work.
While that 30% is up only 2 percentage points from 2022, it still shows a steady and rising rate of people sacrificing their long-term retirement security for immediate needs.
“Retirement security is under threat in America,” Sarah Levy, chief executive of Betterment, said in a release. “Our workforce is eager to save for the future, but they’re facing competing priorities – from student loans to household expenses – that stand in the way of long-term financial security.”
The top three impediments to saving for retirement were paying rent and bills, home or car repair and medical expenses, the report found.
“There’s a debate going on – sentiment is still so low among consumers even as the unemployment rate is low. There’s a disconnect at a much greater extent than many would have thought,” Ben Bakkum, senior investment strategist at Betterment, told MarketWatch. “People dipping into their retirement savings is an interesting corroboration of weaker sentiment.”
Inflation, though moderating from its highs, has pushed up prices of housing, food, transportation and healthcare, Bakkum said. And consumers are still feeling the pain. Higher interest rates have escalated borrowing costs, making mortgages, auto loans and appliances “quite expensive,” he said.
“Inflation may have come down, but the price level itself for goods has not come down from those higher levels. There’s a 20% increase in the basket of goods and services people are buying,” Bakkum said.
The report found that 31% of employees reported facing moderate to significant financial instability, up 9 percentage points from 2022. And only about half (52%) of employees reported currently having an emergency fund — a 7 percentage-point drop from 2022.
Bakkum said without emergency funds, people often have nowhere to go aside from retirement accounts.
Read: ‘Small steps absolutely matter.’ Lack of emergency savings puts retirement at risk.
“Not everyone has an emergency fund. It’s hard for people to establish an emergency fund. It’s hard for some to have the wherewithal to even create an emergency fund,” Bakkum said. “So it creates this effect where you first turn to emergency savings, but without those, you turn to your retirement fund – which should be the last place to go. But it’s often the only place people have to go.”
More than a third of U.S. adults couldn’t cover a hypothetical emergency expense of $400 using cash or its equivalent such as a credit card they’d pay off in full the next month, according to the 2022 Economic Well-Being of U.S. Households report, released in May by the Federal Reserve.
Experts vary on the amount of emergency savings people need to be financially secure. Some have argued that consumers should set aside expenses to last three to six months, while others urge savers to amass an emergency-savings fund that could cover expenses for a full year.
Consumers are in a different position now than during the pandemic when stimulus checks helped some people make ends meet, Bakkum said.
Generation X, those born between 1965 and 1980, are next in line to face retirement after baby boomers and many may be ill-prepared, Bakkum said.
“For Gen X, that’s where the rubber meets the road – where there may be a gap between what they’ll need versus what they have,” Bakkum said. “Gen X may be feeling like they missed the opportunity to save more. That creates anxiety.”
