For many, 401(k) accounts are used both to save for retirement and self-insure against income shocks prior to retirement. Income shocks are the result of job loss, illness, divorce, or other life transitions. Unfortunately, they are common - 96% of Americans experience four or more income shocks by the time they reach age 70.
With support from the National Endowment for Financial Education (NEFE), ReLab investigated how the reality of income shocks leads people, especially those with lower incomes, to make pre-retirement withdrawals from their 401(k) plans. NEFE issued a report summarizing the research findings (listed below), titled, Income Shocks and Life Events: Why Retirement Savings Fall Short. Their report offers a checklist to help workers protect their retirement savings before, during, and after income shocks happen.
Untangling the Determinants of Retirement Savings Balances:
- 401(k) Plans: A Failed Experiment: Inadequate wealth accumulations reflect well-known design flaws in the 401(k) system.
- Household Economic Shocks Increase Retirement Wealth Inequality: Economic shocks, such as job-loss, have particularly adverse effects on retirement savings of workers in low-income households, exacerbating retirement savings inequality.
- Policy Options for Cutting Retirement Plan Leakages: Financial necessity is an important reason low-wage households are more likely to make pre-retirement withdrawals from their 401(k) plans. To ensure that all households both contribute to retirement plans and remain invested, retirement policy should both mandate contributions and prohibit pre-retirement withdrawals.