When not to save for retirement

Everyone should save for retirement – that is a mantra we have all heard endlessly.

But for many people, saving for retirement actually should be fairly low on the financial priority list – well behind the more immediate goals of building a rainy day fund and reducing their consumer debt.

That is evident in new research by the Pew Charitable Trust examining causes and impacts of financial shocks that hit Americans. A Pew survey of more than 7,800 households found that most households have failed to build enough liquid savings outside retirement accounts to respond to emergency needs.



Sixty percent of households experienced a financial shock in the past 12 months – typically lost income due to unemployment, illness, injury, death or a major home or vehicle repair. The financial setbacks affect people of all ages and racial groups, although shocks disproportionately affect younger and minority households.

However, even higher-income workers grapple with the problem. Thirty-five percent households earning more than $85,000 reported a financial shock in the past year.

When income shocks come along, lower-income households – those with income below $25,000 – have enough savings to replace only six days of household income, Pew found. Households with more than $85,000 can replace just 40 days of income from savings.

High levels of consumer debt can be even more damaging, thinks Dirk Cotton, a financial planner and retirement researcher who blogs at The Retirement Cafe. Although retirement researchers often focus on the risk of outliving retirement savings, Cotton thinks debt – and the absence of liquid saving – poses a bigger risk when financial shocks occur. His research shows that debt leaves households vulnerable to multiple financial shocks.

The prioritization questions are striking, considering that policymakers are pushing for new ways to get us to save more for retirement.

California and Illinois are among the states creating plans that would require employers to cover nearly all workers. Just this week, the Obama administration rolled out a proposal to make it easier for small businesses to band together to form 401(k) plans. Others have proposed mandatory, government-sponsored plans that would cover all workers.

Those are admirable initiatives – but they need to be coupled with sound advice about where the first available dollar should go. Learn more at Reuters Money.


  1. Far more important than that people might be saving for the wrong things is that most people aren’t saving for anything at all. I think the advice that people should save first for emergencies and later for retirement — when most people don’t save at all — is too clever by (at least) half. The Pew Survey, though useful in many respects, doesn’t tell us whether those who were shocked would have been less so if they didn’t have retirement savings (it doesn’t report on the relationship between having liquid savings & having retirement savings).

  2. Mark Miller says:

    Josh – thanks for your thoughts, I always find them helpful and interesting.

    The issue here isn’t really saving for multiple things – it’s financial prioritization. This is especially true with debt reduction (an aspect of my column you don’t address). It makes little sense to put money in an IRA or 401k that might return (in a good year) 5% or 6% rather than pay down 20% credit card debt (or high rate student loans). Liquid saving for emergency also makes common sense, as almost any good financial planner would acknowledge.

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