AARP/Retirement Research Center study: “The Effect of a Universal Automatic IRA with Emergency Savings on Household Wealth.”

Background: According to Commonwealth, 36% of Americans are unable to afford a $400 emergency with their current savings. The lack of emergency savings is a critical issue that disproportionately impacts Black, Hispanic, women-led, and lower-income households.

Our research was designed to also understand the influence of Roth IRA savings on creating liquid assets as employee contributions can be accessed penalty free prior to retirement. The study assumed that, on average, $660 was used annually to meet financial emergencies. Liquid assets include any savings/checking assets, plus Roth contributions that are available for withdrawal. Please see Part I and Part 2 for additional methodological details.

Findings: This study found that for the median household, available liquid assets as mentioned above would significantly increase, particularly for workers at lower income levels. In addition, median white households would see an increase in liquid assets of 93% by retirement, while Black and Hispanic workers would see an increase of 150%. Even under pessimistic economic assumptions, the impact would be substantial, with white workers seeing a 14% increase and Black and Hispanic workers showing a 47% rise.

Bottom Line: This research suggests that an Auto IRA program with emergency savings can significantly enhance household wealth and increase the availability of liquid assets. Financial shocks can disrupt household stability, and the creation of additional liquid assets could help to reduce those negative effects.

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