Inflation, higher interest rates and consumer debt create he potential for financial instability for many Americans – as does the occurrence of an expected financial emergency. According to Corebridge Financials’ 2022 survey on Emergency Fund Needs and the American Worker, 74% of Americans are concerned about the effect an unexpected expense will have on their future, with 44% saying they are very concerned, numbers that are even higher for younger workers.
And emergency needs occur – 79% of respondents had at least one emergency expense of $1,000 or more in the past three years. A significant share of workers resorted to paying for their recent expenses by taking on debt, borrowing from a family member or leaving the financial need unmet. One-third (32%) paid their rent or mortgage late, 44% did not make a needed home repair and more than one in four (28%) did not go to the doctor or send their child to a doctor.
Not surprisingly, planning for retirement (61%) and increasing or beginning to save for retirement (60%) were two of the highest priorities – followed closely starting or growing an emergency fund (52%). Addressing these competing financial needs can be a challenge for many.
Enter SECURE 2.0 Act of 2022
On December 29, 2022, retirement legislation called the SECURE 2.0 Act was signed into law as part of the year-end omnibus spending package. SECURE 2.0 aims to improve retirement outcomes by increasing access to retirement plans, growing and preserving savings, and helping Americans manage competing financial priorities so they can achieve long-term financial security. Among the provisions of SECURE 2.0 is section 115, which allows for early penalty-free withdrawals from tax-preferred retirement accounts, such as a 403(b), for certain emergency expenses.
Moments of crisis often short-circuit retirement plans
Conventional wisdom tells us that retirement dollars should be used for retirement. In fact, premature distributions taken before the age of 59½ (with few exceptions) typically incur a 10% penalty—in addition to paying income tax on the withdrawal. Premature distributions can significantly shrink a nest egg because the capital in the retirement account, and any potential growth, will likely be reduced. Despite this reality, participants in crises are often faced with immediate financial needs that challenge long-term financial goals, such as saving for retirement.
Having access to emergency funds could incent better retirement savings
Corbridge's survey asked workers if having access to a limited amount of retirement funds for an emergency would incent them to save more, and most said “yes.” Seventy-four percent of workers already contributing said they would save more and 73% of eligible non-contributors said they would begin.
