Personal Liquidity and Emergency Cash Challenges for Retirees

It’s more common to think about portfolios or financial institutions as having “liquidity issues,” but many U.S. retirees say they would have real difficulty meeting an unexpected $1,000 expense. 

New survey research conducted by the Dornsife Center for Economic and Social Research (CESR) at the University of Southern California, with sponsorship and support from the Society of Actuaries, the National Institute on Aging, and the Social Security Administration, shows a significant portion of older Americans carry less than $1,000 in liquid emergency funds.

According to the data gathered by researchers Leandro Carvalho, Arie Kapteyn, and Htay-Wah Sawnearly, half of survey respondents overall suggest they face routine and significant financial stress, with most reporting they had faced such stress within the prior three years. The research also suggests that even those with sufficient resources to meet their predictable retirement needs can often run into problematic cash crunches.

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“When asked about how hard it would be for them to pay for an unexpected expense of $1,000, fewer than a third say they could easily pay for this expense,” researchers warn. While the percentage who could easily pay this sum was somewhat higher for older adults than for the general population (39%), this is still an unsettling figure from a financial-health perspective, especially given that for many, high-interest credit cards or payday loans are the only ready sources of cash.

“It is notable that many older adults carry debt—such as credit card, student loan or mortgages—potentially undermining their financial security,” the report warns. “Mortgage debt is of particular significance because homes comprise the largest component of net worth of many older adult households.”

Findings show most savers understand that financial decisions such as refinancing a mortgage, managing investments or retiring, “are complex and have long-term consequences.” Yet, “as seen in the [previous edition of this research] and confirmed here, a large fraction of respondents do not seek advice when deciding whether to refinance their mortgage or how to invest their retirement savings.”

Despite this, a number of positive signs come out of the research. Notably, younger and middle-aged respondents are more likely to carry credit card balances than the oldest adults surveyed—a sign that financial stability generally improves over time. 

“Use appears to be modest for such alternative financial services as payday loans, deposit advances or cash advances on credit cards among the older population as well,” according to the research. Overall, only 16% of respondents have taken a cash advance on one of their credit cards in the last three years and fewer than 5% have a payday loan.

Of particular interest for retirement advisers is the fact that almost half the respondents reported experiencing major financial stress in the preceding three years, with higher rates among the younger. Six in 10 respondents with financial stress sought advice in dealing with it.

The full report is online here

Millennials Think $1 Million Retirement Nest Egg Is Impossible

Of the 41% who haven’t started saving for retirement, the majority say they aren’t making enough.

The majority of working Millennials, 64%, do not think it will be possible for them to save $1 million—frequently cited as a savings target—over the course of their lifetime, according to the Wells Fargo Millennial Study.

Fifty-nine percent have started saving, but 41% have not, with 64% of this group saying the reason is simply because they don’t make enough.

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“Saving $1 million is often noted as a nest-egg target to help fund a multi-decade retirement, so we wanted to find out if today’s Millennials think they can get there,” says Joe Ready, director of institutional retirement and trust at Wells Fargo. “A majority don’t think so. Millennials may not realize that if they start saving consistently by their mid-twenties—and stay invested for the duration of their working years—they will likely accumulate $1 million by the time they retire.”

Wells Fargo projects that if a Millennial age 25 earning $32,000 starts saving 5% and increases their savings rate by 2% a year up to a 13% threshold, they could have $1 million by the time they are 65. This assumes that they get a 2% raise every year and earn a 7% return.

Of the 64% who view a $1 million nest egg as an impossibility, their median income is $27,900. Fifty percent of this group has started saving for retirement, 37% are putting away more than 5% of their income and 7% are saving more than 10%.

Of the 32% who do expect to achieve a $1 million retirement nest egg, their median income is $53,000. Seventy-seven percent have started saving for retirement, with 66% of them putting away more than 5% of their income and 28% more than 10%.

The study also found that 34% of Millennials have student loan debt, which averages $19,978. Seventy-five percent of those who have student loan debt say it is “unmanageable.” Nonetheless, 70% of them are saving for retirement at an average savings rate of 5.5%.

NEXT: Challenges for Millennial women

As with other generations, Millennial women face more financial challenges than their male counterparts. Their average income is $28,800, compared to $39,100 for men. Fifty-four percent of Millennial women say they live paycheck to paycheck, compared to 43% of Millennial men, and 61% of Millennial women say their finances are stretched too thin to save for retirement, compared to 50% of men. Perhaps more tellingly, 73% of women in this demographic group do not believe a $1 million nest egg is attainable, compared to 56% of men, and only 56% of women have started saving for retirement, compared to 61% of men.

“The wage gap between male and female Millennials clearly exists, and it’s a real issue,” Ready says. “It’s important that younger women focus on saving and investing now, as this strategy will help put them in good standing for their retirement years.”

Eighty-five percent of Millennials view saving for retirement as an important step towards becoming a financial adult, and 82% say that witnessing people who are comfortably retired makes them want to save more for their own retirement. However, less than half, 45%, regularly review their finances, and only 54% have a budget.

Millennials are also equity-shy. Fifty-nine percent say the current economic climate makes them uncomfortable about investing, and 52% worry about the volatility in the stock market depleting their savings. Seventy-four percent do not believe Social Security will exist by the time they retire.

GfK conducted the survey for Wells Fargo among 1,005 Millennials in April.

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