Americans Turn to Savings and Retirement Funds as Cash Becomes Scarce

Last year, the U.S.’s highest inflation in 40 years had a predictable outcome: Decreasing the amount of money Americans had, indicating difficulties in consumer spending in 2023.

Americans resorted to using their savings and dipping into their retirement accounts to cover rising living costs, as the Federal Reserve’s interest rate hikes. Though the Fed’s hike was aimed at reducing inflation, it also raised borrowing costs.

A recent poll by Quinnipiac University showed that nearly half of Americans reported having less in savings than the previous year. This decline in savings was accompanied by a drop in retirement accounts, with a 13% increase in 401(k) loans and a 24% rise in hardship withdrawals in the past 12 months. The 401(k) withdrawals added to the financial strain caused by a 20% decrease in the value of the U.S. stock market and a 23% drop in the average balances of 401(k)s managed by Fidelity Investments, which totaled $97,200 at the end of Q3 2022.

On Wednesday, the Fed continued its efforts to curb inflation by increasing its benchmark rate by 0.25%. This brought the rate to a range of 4.5% to 4.75%, the highest it’s been since 2007. Despite the Fed’s efforts, inflation has continued to rise, leaving Americans in a more vulnerable financial situation than they were two years prior. This is due to a slow pace of wage growth that has not kept up with the rising inflation, reducing consumers’ purchasing power.

Americans have significantly reduced their savings habits. In April 2020, the personal savings rate hit a record high of 34% but this number has since plummeted to 3.4%. The Fed’s interest rate increases could potentially trigger a recession, but the U.S. job market has held strong, mitigating the effects of declining stock and bond values and a softening economy.

As disposable income decreases, consumers will likely have to reduce their spending. In fact, they’ve already started doing so. Last year, there were fewer purchases of both existing homes and new cars and trucks, compared to 2014 and 2011, respectively. Additionally, overall consumer spending declined in the final two months of the year.

This trend is expected to continue as higher interest rates discourage potential borrowers. The credit reporting firm TransUnion predicts that in 2023, consumers will take out fewer personal loans and mortgages than in the previous year. However, they may turn to their home equity for additional funds. TransUnion also predicts a rise in credit card delinquencies to the highest level since the global financial crisis in 2010.

Despite the challenges, there is still hope for consumer endurance in 2023. Last week, Mastercard reported higher-than-expected fourth-quarter earnings, citing stable consumer spending as a key factor. The CEO of rival company Visa, Al Kelly, also expressed optimism about consumer spending, stating that it shows signs of “boring stability” after reporting their own higher-than-expected fourth-quarter earnings.

However, even Visa’s Spending Momentum Index reveals a decrease in consumer confidence. The index fell eight times on a monthly basis in 2022 and ended the year down 30% from its peak in April 2021. Additionally, the index only slightly increased from November, which was its lowest point outside of the pandemic closures through March to May 2020.