The New Finance of Longevity

Most American Families Are Unprepared For Unexpected Emergency Expenses

Fewer than a quarter of working families had liquid savings of more than three months of their income in 2019, regardless of the family head’s age, race, or family income

New report titled “Emergency Savings: What Do Workers Have Available in Liquid Savings? How Long Can They Afford a Loss of Income?” was conducted and is provided by EBRI. Reprinted with permission. 

Today, EBRI released a study that finds that among families with working family heads under age 65, fewer than one-quarter had more than three months of their family income in liquid — or emergency-type — savings in 2019. Even when the liquid savings threshold was reduced to 75 percent of three months of family income, the picture did not much improve: Just over a quarter of families with working family heads under age 65 had liquid savings in excess of this amount.

“Emergency Savings: What Do Workers Have Available in Liquid Savings? How Long Can They Afford a Loss of Income?” finds that the median family with a working head had less than one month of income available in liquid savings. Further, even families with incomes in the highest quartile weren’t in much better shape: Their liquid savings stood at one and three-quarters months of income.

The presence of a defined contribution (DC) plan did little to improve the situation, with just over one-quarter (25.3 percent) of families with a DC-plan-participant head in 2019 having more than the equivalent of three months of their income in liquid savings, compared with 20.3 percent of the families whose heads were not DC plan participants. The study also examines how addressing short-term savings needs as a separate financial issue could lead to better long-term results, as emergency savings could help preserve assets in DC plans that otherwise might be tapped for emergencies.

Excerpts From ‘Emergency Savings: What Do Workers Have Available in Liquid Savings?’

An important factor for a family’s financial wellbeing is the ability to cover unexpected expenses, such as a car or furnace repair or something even more financially challenging such as a loss of a job. Being able to cover short-term emergency expenses can help improve workers’ long term financial prospects. However, American families do not appear to be prepared for significant short-term financial emergencies, potentially creating a role for employers to help with the development of emergency savings funds.

The need is clearly outlined in findings from the Federal Reserve’s triennial survey of wealth, the Survey of Consumer Finances (SCF). Findings from the SCF show that:

  • Of all families with working family heads under age 65, less than one-quarter had liquid savings of more than three months of their family income in 2019.
  • This goes up slightly when certificates of deposit are added to the liquid savings.
  • Even if the threshold is reduced to 75 percent of three months of family income, only just over a quarter of families with working family heads under age 65 had liquid savings in excess of this amount.
  • At the median, among all families, less than one month of income in liquid savings was available. This only increased to one and three-quarters months for the families with incomes in the highest quartile.
  • The relatively low percentage of families who had liquid savings that surpassed the three-months-of-income threshold held regardless of the family head’s age or race/ethnicity or of the family’s income. The need for emergency savings was not limited to just the families with low incomes or with younger heads.
  • Families whose heads were defined contribution (DC) plan participants were more likely to have sufficient liquid savings to cover three months of expenses than those headed by a nonparticipant.
  • However, even for families headed by a DC plan participant, the number with sufficient liquid savings to cover three months of expenses would not be considered substantial.

Given the low percentage of families who have sufficient savings to cover a loss of income for any extended period, it is not surprising that more and more employers are seeking to address the overall financial wellness of American workers. Employer interest in emergency savings programs lies both in the direct potential benefit to workers as well as the benefit to employers in the form of higher employee satisfaction.