Emergency Savings Linked to Less 401(k) Loan Use, Stronger Retirement Outcomes

Debt is prevalent among members of Generation X and Baby Boomers, prompting some to delay retirement indefinitely, according to a February survey conducted by debt settlement company National Debt Relief. In responses from 1,000 Americans in these cohorts, data showed that 45% carry credit card balances, averaging nearly $9,000, with monthly payments of about $418.

While the National Debt Relief survey highlighted the burden of consumer debt among older Americans, broader retirement trends can be seen in T. Rowe Price’s annual Reference Point report, which analyzed 401(k) plan design and participant behavior using data from more than 2 million active workplace retirement plan participants.

According to T. Rowe Price data, the average loan size grew by 4% in 2024, slightly higher than inflation. All age groups saw increases in average loan size. Loan usage, as indicated by the percentage of participants with loans, increased two percentage points from 2023—but remains less frequent than highs set from 2015 through 2019.

Relative to 2022, those aged 30 through 39 experienced the smallest growth in average loan size, whereas individuals of retirement age saw the highest increase. According to T. Rowe Price, this pattern suggests that financial stressors are increasingly affecting older demographics, challenging the assumption that such burdens are primarily concentrated among younger populations.

Emergency Reserves Fall Short

Most participants reported lacking sufficient emergency savings: According to responses from T. Rowe Price’s Financial Wellness Quiz, 64% of respondents across various industries reported they could not cover six months’ worth of expenses.

Only 28% of women and 42% of men reported having that level of savings, while just 31% of single participants and 41% of married participants said the same.

Industry differences were also stark. Participants in the accommodations and food services sector reported being the least prepared, with 72% reporting they lacked sufficient savings, compared with 52% from the information sector, in which participants were the most prepared of those surveyed. These disparities underscore broader financial wellness challenges that can jeopardize retirement readiness, especially for those most vulnerable to economic shocks, according to T. Rowe Price analysts.

Impact on Long-Term Savings

Despite the availability of emergency expense withdrawals in some plans, optional provisions laid out by the Setting Every Community Up for Retirement Act of 2019 and the SECURE 2.0 Act of 2022 have varied in their appeal to plan sponsors. When they have been offered, data suggest that relatively few participants are utilizing the withdrawal option.

Having a solid emergency fund is a key foundation for building long-term retirement savings. A comparison of participants who reported having at least six months’ worth of emergency savings versus those who did not revealed stark behavioral differences, according to T. Rowe Price analysts: Those with emergency savings: were half as likely to have a 401(k) loan; contribute at a rate four percentage points higher; maintain account balances 2.3 times greater; and were eight times less likely to have taken a hardship withdrawal.

For benchmarking data on the value of retirement plan advisers for plan sponsors, see the 2024 PLANADVISER Adviser Value Survey.