Emergency Savings Protected Retirement Savings During Covid, But Emergency Savings Gaps Prevent Everyone From Having That Protection

Emergency savings for American households have been an important topic for policymakers and researchers, and the pandemic has only underscored how important these savings can be. In particular, the Covid-19 crisis showed us that emergency savings were instrumental in helping people overcome sudden financial shocks. Legislators and plan sponsors alike have responded by introducing new policies and products aimed at bolstering emergency savings.

Joint research between Morningstar, the Aspen Institute Financial Security Program, the Defined Contribution Institutional Investment Association, and NORC at the University of Chicago can help us better understand how to best design these new products and policies. Specifically, we conducted a longitudinal investigation with a representative sample of 2,029 American households to examine how pre-pandemic emergency savings supported financial well-being in the face of financial shock. Let’s look at a few of the key insights from that research.

First and foremost, we found that an emergency savings balance does serve as a cushion, by limiting the need for households to dip into their retirement savings. In fact, households with at least $1,000 in emergency savings were half as likely to withdraw from their workplace retirement savings account (controlling for age, income, partnership status, the balance of one’s workplace savings account, having lost income due to the pandemic, and whether their workplace loosened rules on withdrawing retirement savings per the CARES Act). The protective power of emergency savings increased alongside their balance: households with at least $3,000 in “rainy day funds” were about 3.24 times less likely to report using their retirement savings, and households who have at least $5,000 in emergency savings were almost four times less likely (specifically, 3.85 times less likely) to tap into retirement savings.

An emergency savings balance serves as a cushion, limiting the need for households to dip into their retirement savings.

Yet, we found that income was one of the most significant barriers to having emergency savings. Before the pandemic, low-to-moderate income (LMI) households (i.e., those who earned under $50,000) had eight cents for every dollar that a non-LMI household had stored away in emergency savings. In fact, we found that because LMI households had little emergency savings from which to draw, they were more likely to report using their retirement savings. We can also see signs of this income gap in savings when we examine differences between white, Black, and Hispanic participants in the data. For every dollar that a white household had in median emergency savings prior to the pandemic, Black households had $0.07, whereas Hispanic households had $0.25.

One of the biggest take-home messages of this research is that emergency savings matter during a financial crisis. We’ve now seen the “theory” of emergency savings play out in reality. As we build the foundation for a brighter financial future, we must keep the barriers to emergency savings in mind as we craft policies and products solutions to support sufficient emergency savings for all Americans.