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COVID-19 job losses impacted early withdrawal from retirement accounts: Study

Having a robust emergency savings fund could help people weather financial shocks, such as job loss during the COVID-19 pandemic, finds a new study from the Brown School at Washington University in St. Louis.

"We found that for individuals who lost jobs, those with at least three months' worth of emergency savings were significantly less likely to tap into their retirement savings early," said Haotian Zheng, a Ph.D. candidate and lead author of an article this month in the Journal of Consumer Affairs.

"Ultimately, this study emphasizes the importance of emergency savings in helping workers stay financially resilient during crises," Zheng said. "Building and maintaining a sufficient emergency savings can help people protect their long-term financial security by reducing the need for premature withdrawals from retirement accounts during periods of unexpected income loss."

Researchers, including Stephen Roll, an assistant professor at the Brown School, surveyed 2,923 respondents; 60% of the baseline data were collected in April 2020, during which the unemployment rate peaked at 14.4%.

Twenty percent of those in the sample experienced a job loss, and 10% were forced to withdraw money from their retirement savings.

Overall, the study points out the need for workers to plan ahead financially, Zheng said.

"This study suggests that in the event of another pandemic or large-scale economic disruption, workers without sufficient emergency savings and/or financial knowledge could be at a higher risk of making less desirable financial decisions, such as withdrawing from retirement accounts prematurely," he said.

Employers' role

Businesses and organizations can play a role in helping their workers prepare for future hardship, the researchers said.

"Employers could offer structured emergency savings programs, automatic payroll deductions or matching contributions to make it easier for workers to accumulate savings," Roll said.

"By supporting these savings efforts, employers can help safeguard their employees' financial well-being, which in turn fosters a more secure workforce, ultimately benefiting both the individuals and the organization."

Employment is one of the most important institutions in determining financial security, particularly during times of crisis.

"Given that personal savings rates are often low, relying solely on individual efforts to save for emergencies may not be sufficient or ideal," Zheng said. "Institutional efforts, such as employer-driven initiatives, are likely to be more effective in helping workers build the necessary financial buffer."