Ways to Boost Financial Wellness for Retirement Savers

We think of financial wellness as the level of comfort with your current financial situation and confidence in your future financial outcomes. For many people, the challenges of balancing day‑to‑day household finances while also juggling competing financial goals—such as repaying student loans, starting a family, purchasing a home, or saving for a child’s education, among others—often persist throughout their careers. There is growing recognition that the financial stresses caused by managing these responsibilities could be barriers to successful retirement outcomes.

In this paper, we will examine how the primary sources of financial stress—specifically, the lack of emergency savings and the burden of student loan debt—can negatively affect your retirement savings. Additionally, our research shows that the workplace is the primary source for accessing educational tools and financial guidance and that most employees across all demographics value programs that can help them with building emergency savings (73%), basic financial education (61%), and student loan repayment (31%). Optional provisions in the recently passed Setting Every Community Up for Retirement Enhancement 2.0 Act (SECURE 2.0) retirement legislation could also help with these challenges.

Many workers are not saving the suggested 15% of their pay, including any employer match, for retirement. In our 2022 T. Rowe Price Retirement Savings and Spending Study, 55% of survey respondents stated that they are not saving enough for retirement or are not sure if they are. Among these respondents, 62% indicated that they were saving all they could afford.¹

In our analysis, we examined how untimely retirement account withdrawals—many times to fund emergency costs—and undersaving can hamper successful retirement outcomes. We believe that addressing financial wellness challenges can enable individuals to save sustainably for retirement.

Life is full of surprises, some of which can be quite expensive. Unexpected illness, home repairs, vehicle breakdowns, etc., can cost thousands of dollars. According to a recent Bankrate survey, 57% of Americans couldn’t afford to pay for a $1,000 emergency expense.² More common is the intention to use debt, such as credit cards (50% of respondents in our survey³), to pay for an unexpected expense.

The inability to cover life’s sudden, and often unforeseen, costs can damage your chances for a comfortable retirement. Among our survey respondents, 14% stated that they were likely to tap into their workplace retirement accounts to cover emergency expenses. Below, we outline how these untimely withdrawals can affect your retirement savings in the long term.

Relying on retirement savings to cover unexpected expenses can develop into an ongoing pattern, and unless the real underlying problem is addressed—a lack of emergency savings—this cycle is likely to continue repeatedly. Indeed, our research shows that retirement loan activity increases with age through working years and is not a generational issue limited to younger employees.

Further, our research showed that people who borrowed frequently from their retirement plan accounts had lower savings rates—by 2.3 percentage points, on average—than those who rarely, or did not, borrow from their accounts.

We acknowledge that retirement plan loans are not inherently an indicator of poor financial health. Data show that, if taken strategically, you can minimize the long-term impact of a retirement plan loan on your retirement outcome. In fact, we found that the contribution rates for employees who took one large loan (over $10,000) were in line with employees who did not take retirement plan loans (Figure 1).

However, a focus on smaller loans is more telling. As shown, the average contribution rate for people who took multiple small loans (less than $2,000) per year was meaningfully lower. This means that even an emergency fund of $1,000 to $2,000 could provide a crucial financial buffer and prevent the recurring need for these small retirement plan loans. The frequency of these small loans may be a sign of financial stress, as people may be using their retirement savings to supplement their incomes.

Relatedly, not only did employees who took retirement plan loans save less than their peers who did not take loans, they also had lower average plan account balances (Figure 2). Indeed, despite a consistent average age and job tenure, account balances for people who took an average of more than two loans per year were 60% smaller than for employees with no loans.

Notably, our data further revealed that 10% of workers who took two or more loans also had taken hardship withdrawals. These workers had an average account balance of $26,000, about one-quarter of the account balance of their peers with no loans.

Persistent retirement plan loans, lower contribution rates, and lower retirement account balances all could be signs of financial stress. An adequate emergency savings fund can help you absorb financial shocks without sacrificing your retirement security. A pattern of undersaving and untimely withdrawals can be detrimental to successful retirement outcomes.

Where permitted, some employees may take hardship withdrawals from their workplace retirement plan accounts. These withdrawals typically are intended to meet an immediate financial need and are limited to the amount necessary to satisfy that need.

Unlike loans, hardship withdrawals cannot be repaid to the plan account, and these distributions are subject to a 10% penalty if distributed prior to age 59 1/2. As with retirement loan activity, it is not surprising that individuals who have taken hardship withdrawals also tend to have lower average plan account balances and contribution rates than individuals who have not taken those distributions (Figure 3). The long-term compounded effect of taking hardship withdrawals can result in dramatically lower account balances.

Our study found that savers who were nearing retirement and had not taken a hardship distribution had, on average, three times more in savings than their counterparts who had taken hardship withdrawals.

Employers, retirement industry professionals, and lawmakers are paying close attention as employees continue to express a need for comprehensive financial wellness programs that can help them manage the competing priorities of saving, spending, and servicing debt. In late December 2022, U.S. lawmakers passed SECURE 2.0. This legislation builds on the retirement reforms introduced by the original SECURE Act of 2019.

Overall, the workplace remains an important source of advice for retirement savers, and SECURE 2.0 includes provisions that allow employers to implement solutions that could improve their employees’ financial wellness. In particular, a provision in the new law will allow employers to elect to update their plan to offer a Roth “emergency fund” to their non-highly compensated employees starting in 2024.

Eligible employees in plans that adopt this provision will be able to make limited contributions to Roth emergency savings accounts and have access to those funds penalty-free. Contributions to the account are invested in short‑term investment vehicles, such as money market funds, and would be eligible for any employer match into the employee’s retirement account as an extra incentive to save.⁴

SECURE 2.0 also recognizes that financial realities can drive the need to tap into retirement assets. Employers could, therefore, opt to allow their employees to take emergency withdrawals of up to $1,000 generally once every three years. Unlike hardship withdrawals, the amount withdrawn would be penalty‑free and could be repaid to your plan account within three years. If repaid, or if you subsequently make contributions to the plan at least equal to the amount of the prior emergency withdrawal that has not been repaid to the plan, you would be entitled to take another emergency withdrawal before the full three calendar years following your prior emergency withdrawal have elapsed. Having this money handy can save you from taking money out of retirement accounts or putting unexpected expenses on a credit card.

In addition to a lack of emergency savings, the burden of student loans is another potential barrier to retirement savings. Americans owe more than $1.6 trillion in government-issued or government-insured student loan debt, of which 24% was in either forbearance or default.⁵ For many workers, repaying student loan debt is a significant competing priority to saving for retirement. Among the employees we surveyed, roughly 1 in 4 reported that they had outstanding college debt.⁶

Our analysis also revealed that younger employees—who tend to earn lower wages than older workers—were more likely to have outstanding student loans (Figure 4). While retirement plan participation was on par across employees with or without college debt, employees with student loan debt had lower contribution rates than those without student loans across all age groups.

The difference in contribution rates was more pronounced among Generation Z workers. In that age group, those with student loans contributed over 30% less to their retirement plan savings compared with their peers without loans.

The new law also includes an optional provision to help enable and encourage employees with student debt to save for retirement. Beginning in 2024, employers with 401(k) plans, 403(b) plans, or governmental 457(b) plans could elect to update their plans to allow matching contributions on qualified student loan payments to the employee’s retirement account. As of the writing of this paper, we are waiting for guidance from the Internal Revenue Service regarding Parent Plus loans and whether these repayments are eligible for the student loan matching contributions.

Managing everyday living expenses and debt are often cited as the top sources of financial stress, as well as barriers to saving for retirement. Through optional provisions in SECURE 2.0, employers may choose to implement some meaningful changes that could have a positive impact on retirement savings for many Americans by helping to address these challenges.

While some individuals may not be largely affected, it is important to consider how these changes to the laws could affect your personal circumstances. Taking advantage of these provisions, where available as a workplace benefit, could have a meaningful impact on your financial well-being and your retirement outcome.

Starting to save early and then saving consistently can make a big difference in helping you retire on your own terms. Postponing retirement saving can be costly, as a dollar saved at age 40 or later doesn’t have the same time to compound as a dollar saved earlier in life. When saving for retirement, slow and steady typically wins the race.

Retirement Savings and Spending Study
The Retirement Savings and Spending Study is a nationally representative online survey of 401(k) plan participants and retirees. The survey has been fielded annually since 2014. The 2022 survey was conducted between June 24 and July 22. It included 3,895 401(k) participants, full‑time or part‑time workers who never retired, currently age 18 or older, and either contributing to a 401(k) plan or eligible to contribute and have a balance of $1,000+. The survey also included 1,136 retirees who have retired with a Rollover IRA or left‑in‑plan 401(k) balance. NMG Consulting conducts this annual survey on behalf of T. Rowe Price.