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AARP: Adding Automatic Emergency Savings to Retirement

by U.S. Financial Diaries

A new report from the US Financial Diaries project provides evidence that lower income households are saving up for frequent, short-term emergencies that prevent the growth of long-term savings. Could 401k style auto-enrollment programs help to manage both long- and short-term savings goals?

Recently the AARP blog proposed such an idea, citing research from USFD:

[USFD's] studies found that low-to-moderate income households are saving for near-term small emergencies. However, those situations happen so often that they prevent households from building up higher savings for larger emergencies. A split auto enrollment plan would help them to have money for those bigger problems.
One way to structure such a plan would be to automatically enroll an employee into a saving program where part of the contributions would go to a regular 401k-style retirement saving account and the rest into a passbook savings account at a federally insured bank or credit union. The emergency savings could be a percentage of the total contribution or based on income levels, such as a percentage of contributions on the first $20,000 of annual income. Auto escalation would apply only to the retirement contributions.

The full article is available here.