Financial Stress Has a Major Impact on Savings

An ongoing theme of this blog has been that retirement savings does not occur in a vacuum. To quote John Lennon, "Life is what happens to you while you're busy making other plans." Most people would readily agree that saving for retirement is a very important goal, but for most people, it is not the only goal. Sometimes challenging circumstances get in the way and difficult choices are made - a family member faces health challenges, a natural disaster results in extraordinary expenses, a return to employment after a layoff takes longer than expected, the value of housing plummets precipitously, and more. Saving for retirement takes a back seat to the more immediate financial challenge. Perhaps a participant takes out a 401(k) loan. Or a distribution is taken early to address current challenges. The tax code arguably is designed to keep participants on track for a more secure retirement, but its early withdrawal penalties may make it more difficult for individuals and families just when they need help the most. In an earlier blog post, I modestly suggested that legislation that would add certified financial challenges to the list of exceptions to the 10% early distribution penalty, while simultaneously encouraging repayment of borrowed funds as soon as the hardship is over, would go a long way to getting or keeping families on a  better financial path for themselves and for the economy as a whole. If participants are contributing more because they know that they will still have access to their accounts, then if they are never laid off, their existing accounts will have grown very substantially, probably significantly more than is now the case for most.

This brings us to an important finding from a study prepared by New York Life, along with Greenwald & Associates. It recognizes that saving for retirement is part of the holistic view of personal finance. In essence, savings do not occur in a vacuum. The study posits that retirement providers need to understand this premise if they are to effectively help participants: "Simply focusing on retirement planning in our participant education and engagement strategies ignores the complexities of an individual's financial life - and rings hollow and incomplete." The report takes it a step further with this call to action: "To successfully empower individuals to save for retirement, it is imperative that we need tools and advice to support the broad spectrum of their financial lives." 

Why does this matter so much? According to the report:

• Nearly 3/4 of participants are stressed or very stressed.
• Financial stress impacts health, productivity, and quality of life.
• 60% are worried about possible financial difficulties.
• Nearly half are worried about affording medical expenses or job loss.
• Women feel more stressed (34%) than do men (22%).

New York Life recommends a holistic approach that helps individuals navigate the various financial challenges. I would take it a step further and have it change according to the needs of the individual. For example, if there is a job loss or unexpected expense, what are the best options for moving forward? How do you face current hurdles alongside future goals?