Recently, due to the uncertainty in the economy, Americans have been experiencing subtle changes in their spending habits. Some households have become more frugal in their daily expenses, while others are using their retirement savings for financial flexibility and emergencies.
According to a report from The Wall Street Journal on August 3, in the years following the pandemic, American consumers have shifted from the positive attitude towards spending on everything from home renovations to travel to more cautious and budget-conscious behavior, signaling a departure from the previous carefree spending habits. People are realizing they are in the midst of an economically uncertain summer.
The report mentions that based on federal data released last week, consumer spending in the first half of this year remained stagnant, with many CEOs of companies telling investors that their customers are now being more thrifty.
Interviewed ordinary consumers are cutting back on unnecessary expenses in their daily lives, avoiding buying additional items, being more mindful of their purchases, and making do with what they have rather than constantly buying new. In general, people are becoming more diligent and thrifty.
A survey conducted last month by Empower, a giant in the 401(k) retirement savings plan, revealed that Americans are now spending almost four hours a day thinking about money, equivalent to a part-time job. More than half of the 2,206 adults interviewed said they are more financially conscious than before.
The largest chain supermarket in the U.S., Kroger, has observed an increase in the frequency of customer visits but a decrease in the number of items in their shopping carts. Customers are resorting to using coupons again and making trade-offs in non-essential items like alcohol. Kroger CEO Ron Sargent stated, “We are witnessing a different shopping behavior where customers are seeking value for their money.”
Earlier reports indicated that more Americans are becoming concerned about saving enough for their retirement. The automatic enrollment system has attracted more workers to join 401(k) accounts, enabling them to have savings for emergencies.
Reports mention that after fifty years since the introduction of the 401(k) retirement plan by employers, it has finally reached a tipping point. Currently, about 70% of private sector employees have access to the plan. More companies are automatically enrolling employees, significantly increasing participation rates.
Additionally, more Americans are now viewing their 401(k) accounts as a cash machine, serving as an emergency fund for many. According to data from Vanguard Group, the percentage of 401(k) account holders withdrawing funds early to address financial emergencies hit a historical high last year.
Data from Vanguard and Empower’s annual reports show that Vanguard’s hardship withdrawal and loan usage rate was as high as 4.8%, while Empower’s hardship withdrawal and loan behaviors slightly declined or remained stable.
The financial pressures resulting from the different customer bases served by each company are evident in the data analysis. Vanguard caters mainly to high-income tech, finance, and large company employees who historically infrequently withdrew funds, whereas Empower’s customer base includes a wider range of sectors who are used to tapping into their retirement accounts for emergencies without significant change despite the high numbers.
Furthermore, Vanguard has a very specific definition of “hardship withdrawal” with clear tax implications and changes outlined. Empower includes various types of withdrawals aside from reporting hardship withdrawals, such as general withdrawals, loans, and post-employment withdrawals, sometimes resulting in different trends.
The reports from the two companies have different data timeframes. Vanguard’s data reflects a year-long observation of fund withdrawals rising in 2024, while Empower’s report covers until the first quarter of 2025 and acknowledges a slight stabilization in withdrawals after a noticeable increase in hardship withdrawals in late 2023 and early 2024.
Reader comments on this issue show that each individual has different intentions and purposes for withdrawing from their retirement accounts.
One reader named David Gossett from The Wall Street Journal commented, “Young people are using their 401(k) retirement accounts to pay for Starbucks, a $1,000 monthly car loan, and to fund their love for travel.”
Another reader named Joseph Erbal Konrad stated that he does not consider his 401(k) account as an emergency fund but rather uses it for loans. He mentioned, “I owe myself the money for it, helping diversify my investment portfolio and stabilize my overall investment portfolio. It allocates part of the funds to assets that are essentially fixed income with current interest rates at 8% or 9%, ensuring returns regardless of how bad the stock market is.”
He also shared his three basic principles for borrowing: it must be for a prudent purpose, proportional to the purpose, and repaid within a reasonable period, usually a year or less. “For some people, this is a useful option.”