Everyone should save for retirement - that is a mantra we have all heard endlessly.
But for many people, saving for retirement actually should be fairly low on the financial priority list - well behind the more immediate goals of building a rainy day fund and reducing their consumer debt.
That is evident in new research by the Pew Charitable Trust examining causes and impacts of financial shocks that hit Americans. A Pew survey of more than 7,800 households found that most households have failed to build enough liquid savings outside retirement accounts to respond to emergency needs.
60% of households experienced a financial shock in the past 12 months - typically lost income due to unemployment, illness, injury, death or a major home or vehicle repair. The financial setbacks affect people of all ages and racial groups, although shocks disproportionately affect younger and minority households.
However, even higher-income workers grapple with the problem. 35% households earning more than $85,000 reported a financial shock in the past year.
When income shocks come along, lower-income households - those with income below $25,000 - have enough savings to replace only six days of household income, Pew found. Households with more than $85,000 can replace just 40 days of income from savings.
"We don't talk enough about the balance people need to strike for themselves between consumption, preparing for the short-term and preparing for the long term. All three are important," said Clinton Key, research officer with Pew's financial security and mobility project.
Another sign of imbalance: a sizable share of financially stressed households also are saving for retirement, according to Pew. 35% of households with no liquid saving said that they do own a retirement account.
These accounts often are used as emergency funds - 23% of workers have taken a loan or early withdrawal from their retirement savings, according to a 2015 survey by the Transamerica Center for Retirement Studies. But withdrawals from IRAs and 401(k)s by investors younger than 59-1/2 are subject to a 10% withdrawal penalty in most cases, plus any income tax that is due.
In addition, the paperwork necessary for getting your money out of a retirement account easily can take a couple of weeks. That is too long to meet some emergency needs.
Digging Out of Debt
Eliminating high-interest consumer debt is another priority that generally should come ahead of retirement saving. The percentage of older households carrying debt is troubling: in 2014, some 47% of baby boomers still carried mortgage debt (median balance: $90,000), according to the Pew study. 41% carried credit card debt and 35% had an auto loan.
"Getting rid of consumer debt by the time you retire is huge," said Dirk Cotton, a financial planner and retirement researcher who blogs at the Retirement Cafe. "I have three kids in their twenties, and they're constantly reading that they need to be saving for retirement. But I tell them there are more important things. One of them is, don't run up a huge amount of consumer debt."
Retirement researchers often focus on the risk of outliving retirement savings, but Cotton thinks debt - and the absence of liquid saving - poses a bigger risk when financial shocks occur. His research shows that debt leaves households vulnerable to multiple financial shocks. During the Great Recession of 2009, households over age 65 accounted for 8.3% of all bankruptcy filings, up from 7.8% in 2006, according to the Institute for Financial Literacy.
"It can start with a job loss that forces you to borrow on the credit card to meet living expenses," Cotton said. "But as the balance grows, the interest rate gets higher and higher, and the credit ultimately is cut off. Now you have a financially devastating problem that is really difficult to escape."
A better approach, he argues, is to focus on debt reduction and aim to maximize retirement income through delayed filing for Social Security benefits.
The prioritization questions are striking, considering that policymakers are pushing for new ways to get us to save more for retirement.
California and Illinois are among the states creating plans that would require employers to cover nearly all workers. Just this week, the Obama administration rolled out a proposal to make it easier for small businesses to band together to form 401(k) plans.
Those are admirable initiatives - but they need to be coupled with sound advice about where the first available dollar should go.
"You can easily get the impression that the biggest retirement planning problem is how much of your portfolio can you spend every year and not go broke," Cotton said. "But most people don't have a big portfolio, and we don't hear nearly enough about this huge group of other risks people face."