Exploring the relationship between financial wellness and retirement savings reveals a profound relationship between the two, according to new research from T. Rowe Price.
More specifically, the research found that financial stress is a predictor of financial wellness, and retirement plan participants who report being stressed about debt are saving less for retirement than those who are not stressed. The same is true with budgeting. Those who report higher levels of budget-related stress also report saving 25% less than those with lower levels of budget-related stress.
These insights—contained in Financial Stress Is a Predictor of Financial Wellness—are based on the firm’s annual Retirement Savings and Spending study, and analysis of its proprietary Retirement Behavior Index, which measures people’s day-to-day financial behaviors, progress made toward the financial goals and how today’s actions may affect their future retirement.
“What our research found is that financial stress is a predictor of poor financial wellness. However, there are multiple causes of financial stress, and they affect people differently,” explains Joshua Dietch, head of Retirement Thought Leadership and author of the paper.
For those who struggle with financial wellness, stress most frequently stems from the inability to manage debt, budgeting, or lack of retirement and nonretirement savings, the paper notes. In contrast, those with higher levels of financial wellness report being more concerned with health care costs or managing their investments, suggesting that, for this cohort, financial stress may originate from managing wealth rather than managing debt or seeking to save.
And often overlooked is the effect of time. Those who start to save early benefit from years of saving and compounding returns, but the longer participants are distracted from saving, the more challenging financing retirement becomes, explains Dietch.
Disproportionate Impact
But according to T. Rowe Price’s analysis, 73% of younger workers (30 years old and younger) reported moderate-to-high levels of stress related to budgeting compared with 40% of older workers (50 years old and younger). In contrast, younger workers are less likely to be stressed about retirement savings than those who are entering or who are in the middle of their working years (30–49 years old) at 50% and 65%, respectively.
In addition, women are 26% more likely than men to experience higher levels of financial stress, particularly as it relates to debt, budgeting, nonretirement savings and health care expenses. The research also found that financial stress is experienced disproportionately along racial and ethnic lines. black and Hispanic workers were 34% and 40% more likely than white workers to experience higher levels of debt-related stress.
Survey respondents are also aware of their vulnerability and would like to take steps to address it. In fact, 88% of those surveyed shared that saving for an emergency was a “major or minor” financial goal, but nearly a quarter of respondents reported making not very much or practically no progress toward meeting their goal.
Moreover, when asked how they might pay for an unexpected expense, only a third of the workers surveyed claimed they had an emergency fund specifically allocated to meet that need. More common is the intention to use debt such as a credit card (43%) to pay for an unexpected expense, the paper notes.
Priorities and Relevance
While financial priorities may change with time, it is also important to consider how likely employees are to engage with financial wellness programs and what they may use them for, the paper further emphasizes.
For example, when delivering a program designed to help employees manage debt or budgeting, it is important to know that older workers are less likely than younger workers to use a program. To that end, T. Rowe Price’s research shows that if their employer were to offer help managing debt or budgeting, younger workers would be more likely to use these programs than older workers.
As such, plan sponsors and other stakeholders that are considering strategies to address financial wellness should take note that relevance is a significant factor, as audiences have unique and often discrete needs, the paper notes.
“This opportunity centers on helping plan participants improve their day‑to‑day household financial behaviors, make greater progress toward the financial goals they set for themselves, and improve how they view their future self living in retirement,” writes Dietch. In fact, based on the firm’s study results, 78% of employees rely on their workplace for advice and support on how to achieve lifetime financial goals.
Actions the paper suggests are worth considering include:
- choosing plan design features that both nudge and incentivize plan participation and saving among the employee populations least likely to do so;
- considering innovations such as matching student loan debt repayments or establishing an emergency savings program, which can sit alongside the retirement plan;
- offering programs that help employees assess their point‑in‑time financial health and prioritize financial goals, such as targeted, personalized communications to encourage employees to take financially healthy actions, such as increasing savings or paying down high interest rate debt.
