Increasing credit card debt is itself tied to a decrease in savings toward retirement. Image: Atstock Productions/Shutterstock.com
By: FEDweek StaffA study stresses the need for retirement savers to have a reserve of readily available cash to cover a major unexpected expense, saying the alternative typically is to reduce savings toward retirement or increase credit card debt.
Increasing credit card debt is itself tied to a decrease in savings toward retirement, says the Employee Benefit Research Institute in a study of spending and savings by public sector participants in defined contribution plans such as the federal TSP.
The report expanded on an earlier study of responses by private sector employees to a spending “spike,” defined as an expense of at least 25 percent in a month above the median of the prior 12 months. It said that 29 percent of households have had such an expense within the prior 12 months, with about half of those having had more than one. Such surges—for example, a major car or home repair—“can play havoc on a household’s finances and possibly lead to the need to access more funds,” it said.
“These spending spikes have a clear impact on the likelihood of public-sector DC plan participants taking a plan loan and increasing their credit card debt in the year of the spike. Of those with a spending spike in the analysis year, 7.0 percent took a new plan loan 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,” it said.
It said that of those with insufficient income or cash on hand to handle such an expense, those with lower levels of credit card debt were much more likely to add the expense to that debt than to take out a loan from their retirement savings plan. Those with higher levels of credit card debt were less likely to add it to that debt and more likely to take out a loan.
“This research found that, like private-sector DC plan participants, 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. 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,” it said.
“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,” it said.
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