How the Secure Act 2.0 Can Bolster Emergency Savings

By  Liam Gibson

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Americans have been on an economic rollercoaster since the pandemic, riding through the remote work revolution, stock market booms and busts, labor shortages, mass layoffs, soaring inflation, and rising interest rates. Some extra savings are one thing to fall back on during such tumultuous times.

Yet, for many Americans, finding the cash to make ends meet during emergencies is not so simple. Now, help from Capitol Hill has arrived. Provisions included in the Secure 2.0 bill – signed into law at the end of last year – make it easier for workers to build an emergency fund.

Retirement plan sponsors can now give employees the option to automatically deduct post-tax money from their pay slip to an emergency savings account each month, with an upper limit of $2,500.

In a related revision, workers experiencing an emergency can withdraw up to $1,000 each year from their retirement fund. Note: to be eligible to make an emergency draw again, employees need to return the withdrawn sum within three years. 

The legislation represents a significant step forward in facilitating a financial safety net for working Americans. In this article, we look at the current situation surrounding emergency savings in the country, consider expert advice on what else needs to change, and review some best practices for building an emergency fund.

Image Credit: Depositphotos.

‘State of Emergency’

The state of the nation’s emergency savings accounts is alarming, to say the least.

Around a third of Americans entered 2023 with $100 or less in savings, according to a recent survey conducted by GOBankingRates. Worse, 57% held less than $1,000 in savings through 2022. 

The size of emergency funds varies between age groups. The middle-aged are the least prepared of all, with 45% of people aged between 45-54 having less than $100 in savings last year. In addition, women are statistically less likely to have adequate financial cushioning. According to the survey, 37% of women reported holding less than $100 in backup cash, whereas 28% of men said the same.

Despite the chronic unpreparedness, there is growing awareness of the need to change. It turns out that getting financially secure is a popular goal in 2023.

When Personal Capital asked 2,200 American adults about their top financial goals for the year, 31% of people listed building emergency funds as their number one priority, beating out other goals like buying a car or a home by a significant margin. 

The sense of urgency around savings could nudge employees to opt into the new scheme provided by the Secure 2.0 Act. 

“I do believe that this level of automation will work in favor of employees who are opting into this new provision set forth by the SECURE Act 2.0.,” said Michael Acosta, CFP and Financial Planner at Genesis Wealth

“The reason why 401(k)s or employer-sponsored plans work is that it’s automated and hands-off for the employees. Will $2,500 be enough? I believe this is just the tip of the iceberg.” 

“There is still much more work to be done around financial literacy to educate employees on how to save effectively across various buckets such as: taxable, tax-exempt, and tax-deferred. This is where asset location becomes very important,” he added.

Save Yourselves

When it comes to beefing up your emergency fund, start by setting up automatic transfers from your checking to your savings account regularly. This way, your savings will automatically accrue, and you won’t need as much willpower to cut back on spending. Find a bank that offers a higher interest rate to grow your backup cash. This is especially important given soaring inflation is already eroding the value of your cash pile. The good news here is thanks to monetary tightening by the Fed, the national savings interest rate quintupled last year, and this trend may continue this year. 

There are generally two approaches when it comes to meeting savings targets – spend less and earn more. 

The former could involve reducing monthly bills cutting the cord, canceling subscriptions, and hunting for a better deal on telecoms or utilities. It’s also advisable to cut back on non-essential expenses, such as eating out, drinking, consumer electronics, or fashion items. 

The latter – earning more – can involve taking up a side hustle or getting a job promotion. Also, consider selling old items you no longer need from around the house. This can remove clutter from your home and add to your emergency savings.

With rising inflation and economic instability, the Secure Act 2.0 should give employees a cushion to fall back on during tough times.

Indeed, some firms have already begun trialing emergency savings plans for their staff through projects like BlackRock’s Emergency Savings Initiative. Yet, with the new legislation, automatic enrollment becomes possible. While it is a step forward, more work could be done.

One provision that was notably exempt from the Secure 2.0 Act was a previous proposal to establish a standalone emergency savings fund that would remain separate from retirement plans. There are an estimated 57 million workers in the U.S. without access to employer-sponsored retirement plans like 401(k)s, according to research by the Georgetown Center for Retirement Initiatives.  

Many of these workers are in lower-paying jobs, and they may not find it practically possible to save by themselves. 

“As far as people being underprepared for emergencies, it’s likely an issue related to not being able to make enough income above baseline living needs, or again poor budgeting,” said Curtis Crossland, BA, CFA, and Co-Founder & Planner at Suttle Crossland Wealth Advisors.

“This is a tough reality for a lot of people, and if you truly spend as little as you possibly can without making any savings headway, the only real solution is to find ways to improve income.”

Saving for an emergency is not always as simple as it sounds. By taking advantage of these new provisions and preparing for a rainy day, American workers can move ahead with their emergency savings and bolster their financial security. 

Author Bio: Liam Gibson is a Taiwan-based freelance journalist who covers tech, geopolitics, and finance. He has written for Al Jazeera, Nikkei Asia Review, South China Morning Post, Straits Times, National Interest, and has appeared in Fortune Magazine, and several other international media outlets.

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Disclaimer: This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.

To make Wealthtender free for readers, we earn money from advertisers, including financial professionals and firms that pay to be featured. This creates a conflict of interest when we favor their promotion over others. Learn more. Wealthtender is not a client of these financial services providers.
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