Contact Sales
Enhancing Retirement Readiness: The Role of Emergency Savings
Saving for retirement is the long-term financial goal for most employees – but what happens when the inevitable short-term emergencies arise? Without a safety net, unforeseen expenses can force individuals to dip into their retirement savings, significantly denting their long-term financial security.
Emergency Savings Accounts (ESAs) play a crucial role in bridging this gap. By providing employees with accessible short-term savings, ESAs help prevent early withdrawals from retirement accounts - reducing financial stress and supporting long-term wealth accumulation.
In this blog, we’ll explore how emergency savings contribute to overall retirement readiness, why they’re essential for financial stability, and how employers can empower their workforce in building this vital financial cushion.
The Importance of Emergency Savings
Financial stability isn’t just about long-term goals like retirement – employees also need accessible savings for life’s unexpected (yet unavoidable) expenses. Without savings set aside for emergencies, employees often turn to credit cards, payday loans, or early withdrawals from their retirement savings. Not only does this cause financial stress – it can lead to long-term setbacks.
In fact, almost 60% of Americans wouldn’t be able to cover an unexpected $1,000 expense without borrowing. In a recent survey from SecureSave on the impact of financial stress on Americans, one respondent shared they were “unable to meet property tax and income tax demands plus home repairs. Barely scraping by selling investments.” Another said, “I had no money left in my bank account and had to get a loan.”
This is where Emergency Savings Accounts (ESAs) come in. By offering employees a structured way to build short-term savings, ESAs provide a financial buffer that helps them manage unexpected costs without jeopardizing their future financial security.
What is an ESA?
An Emergency Savings Account (ESA) is a benefit that employers can offer to help employees build short-term savings for unforeseen expenses, such as medical bills, car payments, or home maintenance.
ESAs are post-tax savings plans, meaning contributions have already been taxed. And unlike retirement accounts such as IRAs or 401(k)s, they offer complete flexibility – employees can access their funds at any time without penalties or fees. Plus, they can be seamlessly integrated with payroll deductions – making it easy and automatic to save.
By providing employees with a financial cushion, ESAs reduce the likelihood of early withdrawals, keeping retirement plans on track and improving overall financial wellness. Unsurprisingly, they’re popular too – with 45% of employees citing them as the top choice in the most appealing new benefit category.
Common Retirement Savings Pitfalls
When faced with financial hardships, employees often withdraw funds from their 401(k) or other retirement accounts. But if withdrawals are made before the individual has reached the age of 59½, they typically incur a 10% penalty – as well as being taxed as ordinary income. Beyond the immediate costs, employees lose out on compound growth on the withdrawn amount, which can significantly impact their retirement nest egg over time - and even cause them to delay their retirement.
And it’s not only employees who are impacted. Delayed retirements lead to increased expenses for employers – higher wages, healthcare, and training and development costs, for example. Research indicates that a one-year delay in retirement age can cost employers as much as $50,000 per employee. This means that an employer with 3,000 employees and workforce costs of $200 million may face additional annual costs of $2-3 million due to delayed retirements.
How ESAs Complement Retirement Plans
So, what’s the solution? Employers can support employees to become financially secure – and prepare for the unexpected – by giving them access to ESAs. Providing a critical safety net, ESAs help employees manage unexpected expenses without tapping into their retirement savings.
Integrating ESAs with payroll deductions makes saving effortless, ensuring employees build financial resilience alongside their long-term retirement goals. And when they have both short- and long-term savings strategies in place, employees experience less financial stress, remain on track for retirement, and avoid costly setbacks – such as withdrawing from their 401(k)s – that could delay their financial security.
And the data reinforces these benefits. Consider that employees with an ESA are 50% less likely to withdraw from their retirement funds, twice as likely to increase their retirement contributions, and 70% more likely to contribute to a defined contribution (DC) plan.
Employer Benefits of Offering ESAs
Integrating Emergency Savings Accounts (ESAs) into employee benefits packages is a strategic move – one that enhances financial wellness, reduces stress, and boosts workplace productivity, as well as enhancing overall retirement readiness.
When employees have access to a financial safety net, they are less likely to withdraw from their retirement savings, experience financial distractions, or seek high-interest loans to cover unexpected expenses - all of which means that they are more likely to retire on schedule.
And beyond the financial, new research has demonstrated that emergency savings programs are associated with improved job performance. Employees with an ESA are significantly more focused, less likely to leave their jobs, and experience fewer workplace safety issues. Additionally, reducing financial stress leads to increased job satisfaction and overall well-being, fostering a stronger company culture.
By offering ESAs, you’re not simply supporting employee financial security – you’ll create a more engaged and stable work environment. As organizations look for ways to attract and retain top talent, providing ESAs demonstrates a commitment to employees' financial health, ultimately benefiting both your workforce and your business.
SecureSave is the first purpose-built emergency savings program and the highest impact solution on the market. Simple to implement and low cost, it improves the financial wellness of employees. Partner with us to help your employees feel more secure and ease their financial stress.
