3 Steps to Stay Afloat in Tough Times

En español | Hal and Sylvia Rawley are about to take a 75 percent hit on their retirement investment earnings. And, no, the Pearland, Texas, couple didn’t gamble on some risky stock fund or get suckered into a Ponzi scheme.

They put their money in the bank.

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Specifically, between 2008 and early 2009 the Rawleys invested most of their savings in long-term certificates of deposit, or CDs.

Like generations of prudent retirees before them, the Rawleys believed their CDs would provide decent interest income, and, indeed, the couple earned as much as 4.5 percent interest. But now, as these CDs mature, the Rawleys would be hard-pressed to earn more than 1 to 2 percent if they reinvest in new long-term CDs.

Instead, they chose to warehouse their savings in a credit union savings account earning 1.1 percent.
 
“This country was built on hard work and savings but is now really screwing over savers,” says Hal, 78, who served in the Air Force for 23 years before working for more than three decades in the private sector.
 
The Rawleys — and millions of other older Americans seeking safe income — have become collateral damage in the Federal Reserve’s strategy to rescue our moribund economy. More than three years ago, the Federal Reserve stepped in to buoy the cratering financial sector and protect the economy from a Depression-magnitude backslide.

The yield on tax free money market funds is one of the most frustrating financial problems facing seniors. — Getty

One of the Fed’s key tools is the federal funds rate, the rate banks pay to borrow money. Lower this rate and down go interest rates on CDs, money market accounts and other short-term investments. At the end of 2008 it effectively hit zero. It hasn’t budged since.
 
The idea is that if borrowing is cheap — low rates on savings also mean low rates for loans — businesses and regular folk will borrow money that they will reinvest in the economy. The policy is also meant to drive people into the stock market in search of higher returns, boosting prices there and helping investors and businesses.

Is it working? Well, the country did avoid a catastrophic depression and has so far skirted a second recession, but we have yet to see the economy grow with much vigor.
 
With Federal Reserve chairman Ben Bernanke’s pronouncement that short-term interest rates will stay low through at least mid-2013, we’re looking at a near-five-year stretch of a zero-interest-rate policy. That means for five years running you won’t earn anything meaningful on safe bank deposits such as CDs, and what you do earn won’t keep pace with inflation (recently edging close to 4 percent ).
 
Tricky times indeed. But you can survive the war on savers.

Next: Our three-step battle plan. >>