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Fear Factor

By Tom Foster

Terrorist attacks … earthquakes, tornadoes, hurricanes and other natural disasters … a stock market crash … crime.

There’s much to fear in the modern world.  But what do Middle Americans fear most above all else?

An illness to themselves or a family member and a financial emergency or major expense closely rank as the top fears of people with household incomes of $35,000 to $150,000, according to the MassMutual Middle America Financial Security Study (Middle America Study)1.  The research shows that their anxiety stems in part from an overall lack of financial security.

The Middle America Study reports that two-thirds (66 percent) most fear an illness to themselves or a family member. The lower the household income, the greater the fear, with 73 percent of those with household incomes below $45,000 expressing the highest concern, eight points higher than those earning above $75,000, according to the study.

Meanwhile, 64 percent of those polled cite a financial emergency or major expense as what scares them the most. Two-thirds of lower-income households worry the most about a financial emergency compared to 61 percent of those with household incomes of $75,000 to $150,000.

Another financial fear – a downturn in the stock market – registers with 42 percent of Middle Americans who responded to the study. The differences are negligible between different household incomes.

There are much fewer concerns about scenarios such as a terrorist attack, natural disaster, a burglary or home invasion. Given the relatively low statistical probabilities of these events, Middle Americans are wise to focus on the greater likelihood of health or financial emergencies. Things they may be able to control.

Yet, few are doing enough to control their own financial destiny. Few are saving enough for a rainy day or retirement.

Only half of Middle America reports having enough cash on hand to cover a $5,000 emergency and one in five can’t cover a $500 expense, the study finds.  Nearly three in 10 (28 percent) of those with household incomes of less than $45,000 have virtually no savings.

It’s no wonder why so many (seven in 10) report being unprepared for retirement. Yet, when experiencing a financial emergency, where does Middle America go for cash? All too often they dip into their meager retirement savings.

Overall, 14 percent report withdrawing or borrowing money from their 401(k) plan or other retirement savings to pay a $500 emergency. One in four tap their retirement savings if faced with an expense of $5,000 and the number goes up to 30 percent for those earning more than $75,000.

It’s far too high. While higher percentages of respondents would first look to other resources such as credit cards or going to family or friends, both of those alternatives come with costs of their own.

These research insights are particularly helpful for financial advisors who support retirement plans, especially when plan sponsors are looking for ways to help improve their employees’ retirement readiness.  You can’t improve retirement readiness if you boost 401(k) participation and contributions, only to see employees poach their savings for financial emergencies.

There are a variety of ways to encourage better financial habits. First, advisors should coordinate with their retirement plan provider’s education specialists to better educate and counsel participants. Incorporate money management suggestions and insights to help people better manage their finances, budget for expenses, set aside cash for emergencies, find money for savings, and avoid 401(k) withdrawals and loans. Often, making small sacrifices over time adds up to surprising savings.

Some employers are also willing to limit withdrawals and loans while some are not. If a plan sponsor is experiencing “leakage” from their 401(k), suggest they amend their plan document to restrict the number of loans or withdrawals allowed. Withdrawals can also be capped at a specific dollar amount.

Increasingly, employers are offering voluntary benefits to provide employees with access to cash and benefits when encountering a financial emergency. For instance, low-cost loans based on an individual employee’s financial ability to borrow money, an alternative to high-interest credit cards, are becoming more prevalent.

Benefits such as critical illness and accident insurance may cover medical expenses not covered by high-deductible healthcare insurance and emergency room visits, respectively. A single medical issue can more than pay for the cost of such coverage.

MassMutual’s research shows that Middle Americans’ greatest fears are both real and rational. If advisors and employers team up to make more financial education and resources available at the workplace, then the only thing that workers will have left to fear is fear itself.

E. Thomas Foster Jr. is Assistant Vice President, Strategic Relationships, for Massachusetts Mutual Life Insurance Co. (MassMutual).

12017 MassMutual Middle America Financial Security Study,