Three takeaways from the government shutdown

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This isn’t so much about the Trump-Pelosi political dynamic as it about the lesson that the President just re-taught Americans of all ages.  He taught us how important it is to save.  

Americans aren’t saving (enough) because it’s hard to do.  The 35-day shutdown stopped the steady flow of income for 800,000 federal workers, plus an untold number of businesses that rely on government spending.  As retirees already know, when the paychecks stop coming, there’s nothing left but savings, government benefits, and for the lucky few, pensions or annuities.  

If saving is hard, then how have millions done it so successfully?  For the vast majority, it’s because saving was automatic – through payroll deductions and into separated savings or investment accounts.  Here are three steps you can take to prepare for job or income disruption and for eventual retirement:  

1. Save for emergencies.  All the personal finance gurus advise you to have 3-8 months of expenses covered in an emergency savings account, yet 40% of Americans can’t pay for a $400 car repair bill without tapping credit.  When the car breaks, the medical bills hit, or the layoff comes, you need to be prepared.  That’s commonsense, but what isn’t so obvious is “how” to build up the savings in the first place.  The secret?  Ask your employer to deduct a small amount ($50, $75) from each paycheck and deposit it into a savings or cash management account at a bank or financial institution.  Just make sure it’s separated from your checking account where you’re likely to spend it.  Alternatively, your bank may have a “savings booster” program to automatically transfer a small amount each day or week into a separate savings account for you.  Just ask. 

2.  Save with a Roth 401K or IRA.  Although savings into a retirement account should be ONLY for that purpose of saving for retirement, the IRS rules allow early deductions of principal from Roth accounts without penalty.  There are many other benefits of Roth accounts, but its flexibility to help during bona fide emergencies is

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another reason to opt for a Roth over a traditional 401K or IRA.  Don’t have a 401K at work?  That’s the case for roughly half of the workforce, and that’s why many states are stepping up to offer retirement savings programs so small businesses and others can have an easy and no-hassle retirement program for their workers like large companies usually offer.  In North Carolina, AARP is asking the 2019 legislature to make it legal here just as 12 states have recently authorized.  

3. Join together.  During the shutdown, employee groups, associations, and unions were valuable channels for letting people know about freebies, discounts, and special financial accommodations.  Not being on those e-mail lists or phone trees could mean missing out on money-saving local options.  Going forward, AARP North Carolina is leading the advocacy initiative to create new savings programs for emergency and retirement savings, expanding options for workers to save and making it easier for businesses to help their employees.  To stay informed with advocacy alerts, sign up at www.aarp.org/getinvolved  

The shutdown may have highlighted how much we need emergency savings, but it didn’t reveal how to build savings over time.  Behavioral science research has shown that there are two key ingredients needed for improved savings rates – automatic payroll deductions that take the money out of the paycheck before it can be used elsewhere; and a separate account that doesn’t comingle savings with day-to-day expenses.  While individuals can make these arrangements on their own, few do unless their employer facilitates.