Perfect Storm Coming For Retailers As Household Savings Collapse

Americans, who had been diligently saving following the pandemic, are now grappling with a deep decline in their savings this year, raising concerns among economists about how a drastic reduction in consumer spending will affect retailers and the economy at large.

During the height of the COVID-19 crisis, when the nation endured widespread lockdowns and the economy came to a grinding halt, personal savings among Americans flourished. The Federal Reserve reported that individuals were saving up to 30 percent of their monthly income, resulting in a staggering $2.3 trillion in excess savings between 2020 and 2021.

Fast forward three years, and the savings rate among American households is in deep decline as Americans have burned through a staggering $1.76 trillion from their accounts since 2020.

In February, the U.S. personal savings rate plummeted to an estimated 4.6 percent, significantly below the long-term average of 8.9 percent, as reported by the Bureau of Economic Analysis. 

Economists are concerned that the collapse in household savings could lead to a slowdown in spending and potentially trigger a recession. Consumer spending, which currently accounts for approximately 70 percent of the U.S. GDP, plays a vital role in driving the country's economic growth.

Retailers in particular are concerned that the consumer slowdown in spending will just be hitting as they rely on back to school sales and later the all important Christmas season.

Retail in general is vulnerable to the shifts in buying behavior as the younger and lower-income households most affected by the student loan policy are hit anew with their loan balances. But apparel and home goods are poised to be hit hardest, according to GlobalData research.

Households are likely to make do with some existing school supplies, including electronics, rather than upgrading them this year, according to Mike Graziano, consumer products senior analyst at RSM U.S.

Given the likely timing of payments resuming, families planning for the back-to-school season will need to rethink shopping plans. It will also likely further push consumers to look towards discounts or shopping opportunities with lower cost providers.

Liz Young, the head of investment strategy at online bank SoFiYoung, expressed her concerns in a recent article, stating, "My intuition and common sense says there's not a bottomless pit of savings to support this level of spending, and there's not a bottomless pit of wage growth to keep it elevated enough to drive GDP indefinitely. Time will tell, but I still believe something's gotta give."

Economist Shannon Seery from Wells Fargo explained to Newsweek, "U.S. consumers are saving their income at a lower rate than they were pre-pandemic. This is allowing them to spend more in the near-term, but likely comes at the expense of future growth."

Seery added that by saving less today, households have been able to sustain elevated spending rates, which has helped ward off a recession thus far. However, this reduced savings rate leaves American households more vulnerable to economic shocks and could potentially worsen their financial position during an eventual economic contraction.

The mounting economic pressure on Americans extends beyond inflation. Policies such as the suspension of student loan repayments are coming to an end, with the Supreme Court recently striking down President Joe Biden's plan to forgive debt for millions of borrowers. Student loan interest will resume on September 1, 2023, and borrowers will need to start repaying their debts in October.

The strain on Americans' wallets is also evident as credit card spending increases. Melissa Lambarena, a credit cards expert at NerdWallet, noted that "American consumers have been actively using their credit cards to navigate costs associated with inflation." She added, "Rising prices have led some consumers to rely on their credit cards to make ends meet. We're now at a point where credit card debt is at an all-time high, and the elevated cost of interest rates has only added to their debt burden."

This reliance on credit cards may not be sustainable, and economists anticipate a sudden reduction in household spending by the end of the year. American consumers already collectively owe a record $986 billion on their charge cards, according to data released by the Federal Reserve Bank of New York last month.

All of these factors are also having serious repurcussions on those planning for retirement as the share of workers robbing their future selves remains at an all-time high.

Thirty-seven percent of workers have taken a loan, early withdrawal, and/or hardship withdrawal from their 401(k) or similar plan or IRA, according to a survey released Thursday by the nonprofit Transamerica Center for Retirement Studies (TCRS) in collaboration with the Transamerica Institute. That matches 2022's level, which is also the highest level in the history of the survey.

Those withdrawals underscore why many workers have a pessimistic outlook for their retirement as they grapple with a lack of emergency funds and stretched household budgets that have forced them to tap their nest eggs. The practice could become even more prevalent as new rules make it easier to do so.

"I am deeply concerned about the fragility of retirement security for so many workers," Catherine Collinson, CEO and president of Transamerica Institute and TCRS, told Yahoo Finance.

"The pandemic and last year's turbulent economy with high inflation and falling stock markets took a toll on workers' employment, finances, and retirement preparations. Without extra support from policymakers and employers, it will be extremely tough for many workers to recover."

The survey -- which polled 5,725 workers at a for-profit company between November 8 and December 13, 2022 -- found 30% took a loan and 21% took an early and/or hardship withdrawal.

Generation Z is somewhat more likely than millennials, Generation X, and Baby Boomers to have taken an early and/or hardship withdrawal (28%, 24%, 19%, and 12%, respectively).

The overall findings echo other surveys on retirement account blitzes.

For instance, in 2022, 2.8% of 401(k) plan participants took a hardship withdrawal, a record high, up from 2.1% in 2021 and 1.9% in 2018, according to a recent Vanguard report.

And in the first three months of 2023, the number of plan participants taking hardship withdrawals jumped 33% from the same period a year earlier, with workers taking out an average of $5,100 each, according to a Bank of America report.

The biggest roadblock for the majority (53%) of workers to retirement savings is crystal clear -- debt, the Transamerica survey found. There is, however, a sharp split across generations. Millennials, Gen X, and Gen Z are more likely to say that's the issue than baby boomers (58%, 56%, 54%, and 34%, respectively).

"Lack of savings are hurting everyone-whether you're Gen Z entering the workforce saddled with student loans or Gen X supporting both kids and parents," Sid Pailla, chief executive of the Sunny Day Fund, a financial technology company that helps workers establish emergency funds.

"So when a financial emergency inevitably hits, our research shows that one in five people are sacrificing their retirement security by taking 401(k) early withdrawals or loans."

Other reasons for hardship withdrawals: paying for certain medical expenses (17%), payments to prevent eviction from one's principal residence (16%), expenses and losses incurred due to a disaster in a federally declared disaster area (15%), payment of tuition and related educational fees (14%), cover costs related to purchase of a principal residence (13%), expenses for qualified repairs to damage of principal residence (12%), and burial or funeral expenses (6%).

"With inflation, economic disruption, and the continuing wealth gap, some of the working population simply needs to access their money now," Steve Parrish, adjunct professor and co-director of the Center for Retirement Income at the American College of Financial Services, told Yahoo Finance. "That includes tapping their retirement accounts."

Of course, those withdrawals have long-term consequences, which may be one reason why so many workers are worried.

Four in ten (41%) of workers think that future generations of retirees will be worse off than those currently in retirement, according to the Transamerica survey.

Their greatest retirement fears: outliving their savings and investments (39%), Social Security will be reduced or cease to exist (36%), declining health that requires long-term care (35%), not being able to meet the needs of their family (32%), and possible long-term care costs (31%), the survey found.

These results also echo a recent survey from life insurance giant Allianz Life where people commented that they've reduced or stopped saving for retirement due to recent financial crises and they don't expect to increase their savings levels in the foreseeable future -- leaving them in real danger of outliving their money.   The fear of going broke in retirement was shared by 61% of respondents.

Gen Xers (aged 43-58) and millennials (aged 27-42) are more pessimistic about their financial futures than boomers (aged 59-77), according to the Allianz survey.

"Understandably, Gen Xers and millennials are feeling uncertain about the future. And looking back over the past 10 plus years, who can blame them," said LaVigne. "From financial crises to politics to the pandemic, we all have reason to wonder what else might be just around the corner."

Gen Xers' confidence, in particular, is low -- as they're zooming towards retirement and many are simply not ready. That generation's confidence in their ability to financially support all the things they want to do going forward has trended downward from 75% in 2021 to 73% in 2022 and 69% in 2023.

According to the survey, 54% of Gen Xers have no idea how much money they need to save for retirement, and 59% have no idea how long their money will last in retirement. Furthemore, 64% worry they won't have enough saved for retirement -- up from 55% in 2021.

Again, much of this anxiety boils down to the rising cost of living, with 67% of Gen Xers reporting that their income isn't keeping up.

The stats for this close-to-retirement generation are generally worse than those coming from the millennials, who still have ample time to save before retirement, and boomers, many of whom are already retired.

Regardless of age, nearly 40% of Americans said their retirement strategy has derailed and they aren't sure when or how they'll get it back on track.