More Americans Are Reducing Retirement Savings and Taking on Debt — Why It’s Worse in the Long Run
Written by
Yaël Bizouati-Kennedy
Edited by
T. Woods
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Ongoing inflation has been taking a toll on many Americans, standing at 3.2% in February, according to the latest Consumer Price Index (CPI). Indeed, inflation has caused Americans to reduce savings, take on debt and withdraw from retirement accounts, according to the 2024 Q1 Quarterly Market Perceptions Study from Allianz Life. In fact, 67% say they are more concerned about paying bills than about their financial future, the study found.
What’s more, a whopping 69% of Americans said they have not been able to contribute to their savings as much due to ongoing inflation. Meanwhile, 51% have taken on more debt because of inflation, while 42% have withdrawn from their retirement savings because of inflation.
“Prices have risen dramatically in the last couple of years — and wages haven’t caught up,” said Kelly LaVigne, VP of Consumer Insights, Allianz Life Insurance Company of North America. “The majority of Americans say that their income is not keeping up with rising expenses.”
LaVigne added that while inflation has slowed, higher prices — especially on essentials such as food and energy — did not return to pre-inflation levels, so everyday items are more difficult to afford.
“So, the money needed to make ends meet has to come from somewhere,” he said, noting that, in turn, many people have turned to their savings to make up that difference. “In the present, saving less to keep paying your bills and maintain standard of living can be a stop gap. But it is a temporary solution – prices aren’t going to decrease.”
Why Is It Worse in the Long Run?
Taking on debt or withdrawing from retirement savings should be a last resort, LaVigne said, adding that doing either can set you back financially for years.
“If you are taking on debt with a credit card, that is one of the most expensive ways to borrow money — especially at current high interest rates,” he added. Additionally, by taking money out of retirement accounts, not only may you lose out on future growth, you may be subjected to an additional penalty tax for early withdrawal as well.
“The fact that so many Americans say inflation has caused them to take on debt or withdraw from retirement accounts is worrisome for their financial futures,” he noted.
Reflecting this trend is an increase of so-called “hardship withdrawals.” Concurrent to this, 401(k) balances have been dwindling, according to a Fidelity study. In the third quarter of 2023, the average 401(k) balance decreased to $107,700, down 4% from the second quarter. Meanwhile, the average IRA balance followed a similar trajectory, decreasing 4% in the third quarter to $109,600.
LaVigne recommended that with inflation slowing and prices stabilizing, it’s time to reexamine finances with the future in mind.
“These short-term measures will need to make room for long-term financial strategy,” he said. “Moving forward, you want to have a plan for how to address financial risks like inflation in the future. Too often, though, when a risk is not present, we forget to plan for it.”
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