June 7, 2024
Inflation Alters Perceptions: How Americans View the Economy and Retirement
By many measures, the U.S. economy is thriving, unemployment is near historic lows, economic growth remains solid despite high interest rates, and the stock market continues to reach all-time highs. However, despite these strong economic indicators, many Americans feel negatively about the economy, citing inflation as their primary concern. These inflationary worries are also affecting how Americans view saving and planning for retirement. Recent surveys indicate that Americans now believe they need more money to retire successfully compared to pre-COVID times. They increasingly feel they’ll need to work longer or delay retirement and are saving less to accommodate current costs and necessities. In this article, I’ll explore some bifurcations and trends that may be driving these sentiments.
Housing
Housing plays a significant role in the U.S. economy, not only in terms of its weight on GDP but also in its impact on individual net worth and financial stability. Homeowners, who can lock in housing costs with a 30-year mortgage, are much more insulated against shelter-related inflation. Housing and rental costs remain one of the stickier components in inflation readings, keeping overall inflation above expected levels. There also seems to be a correlation between long-term home ownership and sentiments towards retirement. A recent survey of older homeowners by Fannie Mae found that 72% of respondents felt confident they would have enough income during retirement. Additionally, very few (15%) would consider using equity in their home for extra income, and only 17% had plans to sell or had already sold their homes. “Respondents offered a compelling combination of emotional and financial reasons for remaining in their homes, including a ‘love’ of their home, comfort with the area, and that their ‘home is, or almost is, paid off.’” Homeownership and the stability it offers seem to play heavily into retirement sentiment and success.
In contrast, the post-pandemic housing market has proven much more difficult for prospective homebuyers to navigate. Affordability has become a major challenge as buyers wait for relief in rates or home prices. Making matters worse, data from the National Association of Realtors shows the country had a 3.2-month supply of housing inventory in March, while five to six months would align more with a balanced market. This imbalance is captured in Fannie Mae’s Home Purchase Sentiment Index (HPSI); as of April 2024, 79% of buyers cited it being a bad time to buy, while 67% of sellers thought it was a good time to sell. The troubled housing market feeds directly into the overall sentiment of economic participants struggling with higher rent costs and mortgages compared to pre-pandemic costs. This not only impacts their long-term potential to save for retirement but also means a larger share of homeowners may enter retirement with a mortgage. While 72% of surveyed older homeowners felt confident about having enough income during retirement, this percentage drops to 62% among those still carrying a mortgage.
Financial Hallucinations
Another trend I would describe as financial hallucinations is the significant disconnect between how average Americans on Main Street feel compared to Wall Street, economists, and the media. A recent Guardian/Harris poll (May 2024) shows that 56% of respondents believe the U.S. is in a recession, despite GDP still growing; 49% believe the S&P 500 index is down for the year, although it is up 12% year-to-date; and 49% believe unemployment is at a 50-year high, whereas it is currently under 4% near all-time lows. This points to a problem of what sources of information are “trusted,” as social media increasingly becomes a more relied-upon news source. Firsthand, I have spoken to retirement plan participants about different “concerns” arising from social media, such as the government changing the retirement age, the USD being replaced by digital currency, and Blackrock & Vanguard’s ulterior agenda. The Guardian/Harris poll highlights how inflation significantly impacts everyday people, but also how that perception often overshadows reality. This points to a need for more financial literacy and more accessible financial guidance on managing current situations and understanding how decisions today may impact future outcomes.
It is also important to remember that not all Americans are invested or participate in the stock market. Recent data shows 61% of Americans directly or indirectly (through mutual funds or retirement plans) own stock, meaning the remaining 39% have not benefited from the strong stock market returns over the last few years. This worsens the perception of a strong economy for those who don’t own assets that can help outpace the rate of inflation. The barrier for entry can be higher for some than others; 21% of working Americans lack access to an employer retirement plan, which is the most commonly used investment vehicle. They can still access or invest via brokerage or IRA accounts, assuming they understand how and where to open those accounts and how to fund and manage investments from there. Beyond that, they need to afford to fund savings with a budget squeezed by both interest rates and higher prices. This scenario helps explain the disconnect between someone’s current personal experience and the broader economy, and it also underscores their skepticism about the probability of a successful retirement.
Every economy is cyclical, typically cycling through negative and positive phases. While some economic measures could be better, the current economy is nowhere near bad. Like the economy, the various markets within it go through cycles; we happen to be in what could be described as a negative housing phase, and the same could be said about inflation. Some issues mentioned in this article have more emotional and psychological elements, but it is important for economic participants to stay focused on long-term goals. While this is easier said than done, we can use some of the positives of the economy to help combat negative feelings. For instance, unemployment remains at historic lows, and workers who have access to retirement plans should ensure they are taking full advantage of those. For those saving for a home purchase who feel it is out of reach, using a high-yield savings account can provide access to some of the highest interest rates in years. There are still ways to come out positive in the long run, even in what feels like a negative economy.