By most reports, 401k participants have managed to do a pretty good job of maintaining their retirement plan contribution rates this year despite high inflation and a volatile stock market.
For instance, Fidelity reported last week that 401k savings rates stayed strong through the third quarter of 2022 despite continued market volatility. And T. Rowe Price data shared in late September found that over 95% of 401k participants in plans recordkept by T. Rowe Price did not make any investment exchanges during the first half of the year, and deferral rates overall remained steady at 8.4%.
That fact that participants are doing so is perhaps even more impressive when you consider what’s going on in other areas of the economy that could tempt many to cut back on voluntary contributions to their retirement fund.
People are paying more for just about everything these days, particularly when it comes to basics like vehicles, housing, and groceries.
The Federal Reserve Bank of New York shed some light on the pressures consumers are facing with its latest Quarterly Report on Household Debt and Credit, released last week. The Report shows an increase in total household debt in the third quarter of 2022, increasing by $351 billion (2.2%) to $16.51 trillion.
“Credit card, mortgage, and auto loan balances continued to increase in the third quarter of 2022 reflecting a combination of robust consumer demand and higher prices,” said Donghoon Lee, Economic Research Advisor at the New York Fed. “However, new mortgage originations have slowed to pre-pandemic levels amid rising interest rates.”
Here’s a look at what’s happening in some of the key consumer spending categories where rising costs and stretched budgets can tempt 401k participants to cut back or pause contributions.
Housing prices
The average U.S. monthly mortgage payment as of September 2022 rose to $1,912 from $1,212, an increase of $700, or 57.8%, from a year ago, according to the National Association of Realtors’ most recent Housing Affordability Index.
The effective 30-year fixed mortgage rate was 6.18% this September compared to 2.95% one year ago, and the median existing-home sales price rose 8.1% from one year ago. Mortgage rates this September were the highest since November 2008, when the rate was 6.18%. For comparison, the median home price was $266,700, and the monthly payment was $1,304, with the payment at a percentage of income at 21.8%. A mortgage is deemed “affordable” if the mortgage payment (principal and interest) amounts to 25% or less of the buyer’s income.
Forbes reports the average interest rate for a 30-year fixed mortgage was 6.95%, and the average interest rate for a 15-year fixed mortgage was 6.29% as of the beginning of November 2022, with mortgage rates expected to remain in the 7% range for the remainder of 2022—and for the foreseeable future.
Mortgage debt, which has historically been the largest form of household debt, now accounts for 71% of all outstanding household debt, up from 69% in the fourth quarter of 2019. That’s according to the Federal Reserve data issued Nov. 15.
Credit card debt spiking
Credit card debt increased by $38 billion to $930 billion during Q3 2023, according to Federal Reserve data issued Nov. 15. The 15% year-over-year increase in credit card balances represents the largest in more than 20 years.
The 15% year-over-year increase in credit card balances represents the largest in more than 20 years.
This shows that American consumers are not reining in household spending and are subject to increasing debt due to the higher interest rates triggered by consecutive increases of the Federal Funds rate this year.
A recent GOBankingRates survey found that 30% of Americans have between $1,001 and $5,000 in credit card debt, 15% have $5,001 or more in credit card debt and about 6% have more than $10,000 in credit card debt. Although 6% may seem like a small amount, that means that based on the survey results, 14 million Americans have over $10,000 of credit card debt.
Another recent survey—this one from Inside 1031—found that 49% of Americans depend on credit cards to cover essential living expenses. This is more common among younger generations: 61% of Gen Zers and 53% of Millennials use credit cards for living expenses. Conversely, only 26% of Boomers rely on credit cards to cover essential expenses.
Crazy car prices
Cars—both new and used—are crazy expensive these days, and that is made all the more obvious when you look at what people are paying overall and on a monthly basis in loan terms.
The average price paid for a new vehicle in the United States in October 2022 increased to $48,281 in October, ever-so-slightly slightly lower than the all-time high of $48,301 set in August. That’s according to data released Nov. 9 by Kelley Blue Book, a Cox Automotive company.
The typical monthly car payment hit $738 as of September, which was a record high.
Kelley Blue Book
The average luxury buyer paid $66,645 for a new vehicle in October 2022. The average new Electric Vehicle price was $64,249, well above the industry average and aligning more with luxury prices vs. mainstream prices.
Kelley Blue Book also estimated that the typical monthly car payment hit $738 as of September, which was a record high. Higher prices coupled with higher interest rates get the blame.
Car & Driver reports the average interest rate for auto loans on new cars in 2022 is 4.07%. The average interest rate on loans for used cars is 8.62%. Additionally, the average loan term is currently 69.48 months for new cars and 65.73 months for used cars, according to Experian.
And let’s not forget gas prices, which were up 17.5% in October 2022 compared to a year ago according to the U.S. Bureau of Labor Statistics.
Student loan debt
Student loan balances slightly declined and stood at $1.57 trillion in Q3 2022 according to Federal Reserve data issued Nov. 15.
About 4% of aggregate student debt was 90+ days delinquent or in default in Q3 2022. The lower level of student debt delinquency reflects the continued repayment pause on student loans, which President Biden just extended well into 2023.
According to figures cited in September by Forbes, the average student loan borrower owes $28,950, and 55% of students from public four-year institutions had student loans (57% of students from private nonprofit four-year institutions took on education debt).
Help could be on the way for many student loan borrowers, if President Biden’s student loan forgiveness program clears legal hurdles (likely to be decided by the Supreme Court in early 2023), and in the form of a SECURE 2.0 provision that would allow plan sponsors to make matching contributions to 401k accounts for participants who are paying back student loans.
The SECURE 2.0 retirement reform package is widely expected to be passed during the lame-duck session of Congress by the end of the year.
Grocery costs
According to November Consumer Price Index data released by the Bureau of Labor Statistics, food prices were 10.9% higher in October 2022 than in October 2021.
In 2022, food price increases are expected to be above the increases in 2020 and 2021. In 2022, all food prices are predicted to increase between 9.5% and 10.5%, food-at-home prices are predicted to increase between 11% and 12%, and food-away-from-home prices are predicted to increase between 7% and 8%. Food prices are expected to grow more slowly in 2023 than in 2022, but still at above historical average rates.
SEE ALSO:
• Biden Administration Extends Pause on Student Loan Payments Until June
• Fidelity 401k Report Card: Silver Linings Among More Declines in Q3
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
