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Setting aside money in a rainy-day fund<\/a> can bolster households’ retirement prospects<\/a> down the road, especially for hourly workers with inconsistent income streams, experts said.<\/p>\n Emergency funds are a “security blanket,” said Fiona Greig, global head of investor research and policy at Vanguard Group, an asset manager.<\/p>\n That’s because they offer a cash buffer for people who might otherwise raid their 401(k) accounts to pay for unforeseen expenses in the short term, she said.<\/p>\n 401(k) investors with at least $2,000 of emergency savings are less likely than those without rainy-day funds to tap their retirement plans early, according to new Vanguard research<\/a>.<\/p>\n<\/div>\n Specifically, they are 19 percentage points less likely to take a 401(k) loan and 17 points less likely to withdraw 401(k) funds for a financial hardship, Vanguard found.<\/p>\n Leaving a job is another trigger that allows workers to access their 401(k) savings before retirement age. Job-switchers who have emergency funds are 43 percentage points <\/strong>less likely to cash out their 401(k) accounts than those without, according to Vanguard.<\/p>\n “Emergency savings protect retirement savings,” Greig said.<\/p>\n Retirement savers with emergency funds also save a greater share of their incomes \u2014 2.2 percentage points more \u2014 in a 401(k) relative to those without them, Vanguard found. \u00a0<\/p>\n<\/div>\n Riska | E+ | Getty Images<\/p>\n<\/div>\n<\/div>\n<\/div>\n Policymakers view so-called “leakage<\/a>” from 401(k) plans \u2014 especially cash-outs \u2014 as a big impediment<\/a> to retirement security.<\/p>\n Withdrawing 401(k) assets early generally comes with tax penalties and shortchanges investors, who forgo years of investment earnings on withdrawn funds, experts said.<\/p>\n There would be roughly $2 trillion of additional savings in 401(k) plans over a 40-year period if workers didn’t prematurely cash out their accounts, the Employee Benefit Research Institute estimated<\/a> in a 2019 paper.<\/p>\n More from Personal Finance:<\/strong> Leakage is an especially large concern for hourly workers, Vanguard’s Greig said.<\/p>\n Hourly workers are less likely to have emergency funds and more likely than salaried employees to tap their 401(k) savings early, Greig said.<\/p>\n (That’s not just because hourly workers also tend to be lower earners, she said. The trend persists even when comparing hourly and salaried workers with similar incomes, according to Vanguard’s research.)<\/p>\n Hourly workers have more volatile incomes, Greig said. Without an emergency buffer, they may need to tap their 401(k) if cash flow decreases unexpectedly, she said.<\/p>\n<\/div>\n Ideally, households would set aside enough money to cover three to six months of expenses (like a mortgage and groceries) in an emergency fund, said Carolyn McClanahan, a certified financial planner based in Jacksonville, Florida, and a member of CNBC’s Financial Advisor Council<\/a>.<\/p>\n However, for households barely making enough to make ends meet, anything helps, McClanahan said.<\/p>\n Financial planners generally recommend stashing an emergency fund in a conservative, liquid account like a high-yield savings account or money market fund<\/a>, which earn more interest than a traditional bank checking account.<\/p>\n<\/div>\n Cash-strapped savers can start by diverting as little as perhaps $10 to $25 per paycheck into an emergency fund, McClanahan said.<\/p>\n “Let it grow and before you know it that money will be worth something,” she said.<\/p>\n Workers should automate the savings, either by asking their employer to send a certain amount to their designated emergency account each pay period or by setting up an automatic transfer from their bank account, McClanahan said.<\/p>\n401(k) ‘leakage’ is a large concern<\/h2>\n
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