Peach Tree Times

Recent Vanguard survey data shows many investors have turned to their retirement savings for cash in 2022 as hardship withdrawals reach all-time highs. There was a noticeable uptick in Americans pulling from their savings demonstrating a decline in the financial stability of households, despite IRS penalties.

Vanguard’s Global Head of Investor Research and Policy, Fiona Greig, said this could cause “deterioration in the financial health of the average consumer" as the consumer sentiment index across the South, including Georgia, has declined throughout 2022.

This comes as Vanguard's retirement research team recently found the increase in Americans applying for hardship withdrawals and using funds from their savings accounts is a sign of financial strain among workers in the United States. The number of workers taking cash from their employer retirement plans through new loans, non-hardship withdrawals and hardship withdrawals increased in 2022, survey data shows.

“The recent increase in households drawing on their employer-sponsored retirement,” Greig said, “could be a sign of some deterioration in the financial health of the U.S. consumer.”

Despite this potential deterioration, many investors believe the GDP will grow by an average of 2.7% annually over the next three years, according to a Vanguard report.

The most concerning trend, according to Vanguard, is the rise in hardship withdrawals, which have reached an all-time high across the country. Hardship withdrawals are permitted only to cover an "immediate and heavy financial need" and are subject to income taxes and a potential 10% early withdrawal penalty from the IRS. With all three indicators increasing in 2022, Vanguard suggests the motivation behind the withdrawals could be an increased need for household liquidity.

According to the University of Michigan’s recent Surveys of Consumers, the index of consumer sentiment (Table 5A) has dropped from the beginning of this year and significantly since 2019. As of October, the sentiment index for the South, including Georgia, is 55.7, compared to 96.2 in October 2019. The current index is 57.9 compared to 110.3 in October 2019.

The consumer sentiment index is the leading economic indicator for trends in the U.S. economy based on responses from consumers on whether they are going to spend, how they will spend and what they will spend on, according to a December report published by the Balance.

Vanguard researchers also found several investors are more pessimistic about the short-term outlook for financial markets. This is based on a survey of over 2,000 Vanguard investors on their outlook on the stock market and the economy, as well as data on the accounts of roughly 5 million employer-sponsored retirement plan participants in approximately 1,700 plans administered by Vanguard.

The survey found investors expect the U.S. stock market to rise by just 0.6% over the next 12 months, the lowest since the survey began in 2017. However, they are more optimistic about the long-term outlook, expecting an average annual stock market return of 7.2% over the next 10 years.

Investors are more worried now about extreme events such as a stock market crash or a sharp economic downturn, according to Vanguard. In the survey, investors estimated the chance of a stock market disaster in the near term at 8.2%, a five-year high, meaning investors believe there is a 1-in-12 chance the market will drop by 30% or more in the next 12 months. The probability of an economic disaster, defined as an average of -3% annual GDP growth over the next three years, rose to 8.0%.

This is on par with the second quarter of 2020, just after the COVID-19 outbreak and while the market was experiencing unprecedented volatility.

"Investors may increasingly be worried about the prospect of a stock market crash or a recession in the short term,” said Andy Reed, Vanguard head of investor behavior research. "Overall, our findings suggest that investors acknowledge the possibility of worst-case scenarios and are bracing for short-term pain, but still maintain a positive outlook over the long run."

The survey also found a growing gap between short-term and long-term expectations, with the 10-year growth figure reaching a new high of 4.2%, while the three-year expected growth figure was slightly below average.

"Investors are showing an increasingly differentiated view of the market versus the economy, and long-term versus short-term effects,” Xiao Xu, a Vanguard investment strategy analyst and research lead for the survey, said in the report.

Vanguard has conducted a bimonthly survey on U.S. stock market and economic growth expectations since February 2017.

The survey, conducted in partnership with academic researchers from the Yale School of Management, the Stanford Graduate School of Business, and the New York University Stern School of Business, is sent to a random sample of 2,000 Vanguard retail and 401(k) investors. The sample group holds approximately $2 trillion in assets.

Survey responses and analysis may be useful for advisors, plan sponsors, researchers, and other investors who wish to gauge current sentiment among individual households and compare it to the market, according to Vanguard.