Many workers are dealing with irregular expenses that cannot be covered by their income or cash reserves alone, according to the results of a new study reported by InvestmentNews.
Conducted by the Employee Benefit Research Institute and JPMorgan Asset Management, the research focuses on how these spikes in spending can impact the retirement plans of public-sector defined contribution (DC) plan participants.
A monthly unfunded spending spike was defined as being at least 25 percent above the previous 12 months’ median spending that cannot be funded by the household’s income and available cash reserves in that month. The study found that 29 percent of the households experienced at least one month of these increases.
60 percent of households with incomes of $150,000 or less had jumps in spending not covered by income and cash reserves larger than $2,500 aggregated over the year, and 82 percent had spending not covered by income alone above this threshold. Nearly 25 percent of the households with incomes of $100,000 or more also had a spike.
In order to deal with these financial challenges, 7 percent of households took a new loan from their plans and 31.7 percent increased their credit card debt, compared with 2.7 percent and 25.9, respectively, of those without a spending spike in that same year.
The research found households are more likely to use credit cards before dipping into their 401(k)s. Among those with a credit card utilization rate of less than 79 percent, between 37 and 47 percent increased their debt. However, once credit card utilization exceeded 80 percent, only 22.4 percent increased their debt, while 11.5 percent took out new plan loans.
Public-sector DC plan participants who lack income and cash reserves to support a spending spike are likely to end up with more credit card debt, the study concludes.
“This higher debt can have a long-lasting impact on retirement security, since higher credit card utilization is correlated with lower DC plan contributions and account balances, even when controlling for income,” according to the authors. “Thus, the availability of emergency savings to cover spending spikes can be a critical factor in preventing or stalling a cycle of increasing debt that can significantly impact retirement readiness, wherever the individual works.”
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