U.S. Investor Optimism Plummets in July

The Wells Fargo/Gallup Investor and Retirement Optimism Index is down markedly to +16 from +24 in May and +40 in February.

Driving the decline is the concern among 71% of investors that the so-called “fiscal cliff” will prompt consumers and businesses to pull back on spending and investing, resulting in a retraction in the U.S. economy in the second half of 2012. Additionally, 61% of the 1,020 investors polled in the beginning of July fear that if Congress does not address the fiscal cliff, the U.S. economy will fall back into a recession in 2013.

“People watched the impasse of the debt ceiling negotiations last summer and the effect the breakdown had on the markets and 401(k) balances, so it makes sense that investors are attuned to policy affecting debt and taxes,” said Joe Ready, director of Wells Fargo Institutional Retirement and Trust. “Investors are clearly telling us they worry about a recession.”

More than half, 54%, said they are paying a “great deal” or “quite a lot” of attention to the issue of the “fiscal cliff,” and 69% point to a “politically divided federal government” as a top factor affecting the investing climate. This is up from 64% in May. Other factors that investors believe are impacting the investing climate are unemployment and the federal budget, with 67% citing each.

Only 41% say now is a good time to invest in the markets, down from 48% in May and 52% in February.           

On the plus side, 78% of investors’ household income has either increased (46%) or stayed the same (32%) since 2008, and 37% say there are financially better off than they were four years ago, prior to the 2008 election. However, only 24% are saving more than they were before the recession—with a full 75% saving less (43%) or the same (32%) than they were before 2008.

“It is a good trend to see that almost half of the non-retired investors report an increase in household income since 2008—but only one in four say they are saving more,” Ready noted. “Instead, almost half report a decrease in savings. We feel strongly that people save their way to a solid retirement, and this continues to be a challenge for Americans. I think that many assume that work will be a part of ‘retirement.’”

While 48% of investors believe the job situation facing retired Americans is worse than it is for non-retirees, 79% believe they will have to “reinvent” themselves in retirement in terms of finding new types of employment, with 58% planning to work part time. This may be unrealistic plans, Ready said, noting that “the availability of jobs for people in retirement age is not certain.”

Another positive development is that 87% of retired and non-retired Americans have a financial plan that includes specific goals and targets, up from 78% in 2011. However, 50% of the non-retirees have “guessed” at the savings they will need for retirement, and 24% expect Social Security will be a major funding source for them in retirement. In reality, 52% of retirees say that Social Security is a major funding source.

In addition, 69% of non-retirees say their 401(k) will be a major source of retirement funding, but in practice, only 27% of retirees say it is a major funding source—so there appears to be a disconnect between investors’ expectations of how far their 401(k) will take them and how dependent they will be on Social Security.