A few years ago, Mae B. Haynes routinely earned nearly $1,000 each month on her retirement nest egg of nearly $200,000—enough, she recalls, to pay for all the extras each month after she had spent her Social Security check.
But today, the retired broadcast executive says, she just can’t make ends meet. Blame record low yields on money market accounts and certificates of deposit that produce nearly nothing in interest. As for the monthly earnings from her nest egg, “now I’m only getting $45” at most, explains Haynes, 72, of Wayzata, Minn.
Meanwhile, she says, her auto insurance and property tax rates continue to climb, as well as her heating bills. “It’s not making up what I need,” she says of the return on her retirement funds. “I can’t tighten my belt any tighter except to skimp on food. People like me simply can’t survive on zero interest rates.”
Across America, retirees like Haynes are expressing similar worries as the Federal Reserve has flooded the nation’s banks with money in a successful move to drive interest rates near zero and stave off the collapse of the nation’s financial system.
Now, banks have enough capital that they don’t have to compete aggressively to win a saver’s deposits. The near-zero rates they’re offering on deposits are injuring retired Americans who need higher returns on their accrued savings to pay the bills.
“It’s the single most common question I get from most people looking for investment ideas,” says James M. Klein, principal and senior portfolio manager for Meritage Portfolio Management, an investment management firm based in Overland Park, Kan. “They want to know, ‘What can I do to keep some money safe, but still make a decent return?’ ”
According to data from the Social Security Administration, more than half of all married recipients—and nearly three-quarters of unmarried recipients—get more than 50 percent of their income from investments and pensions outside Social Security. These older Americans are especially hurt by low interest rates. (The 35 percent of all retirees for whom Social Security makes up 90 percent of income are essentially unaffected.)
Klein says a typical client comes to him after having a certificate of deposit mature that once paid 3 percent per year, or $125 per month on a $50,000 investment. Now, that same CD may pay only $50 per month, and the client wants something better.
“What I try to explain to them is that their government has given them a choice: either [the opportunity for] a decent return on their investment, or the safety of their principal. It’s just that unfortunately today, you can’t have both.”
‘A gasp of frustration’
Brandon Kipp, a financial adviser at the Farmers & Merchants Bank in Burlington, Iowa, says his clients were initially frustrated and angered by the cut-rate interest being offered on CDs and money market accounts. “Now they accept that it is what it is. It’s more a gasp of frustration.”
The best rate his bank now offers is 1.4 percent on a 16-month certificate of deposit, meaning a $50,000 investment would yield a mere $43.75 per month. “If their money is coming out of a CD, it’s pretty clear that their tolerance for risk is very low,” Kipp says.
Kipp recalls the late 1970s and early ’80s, when certificates of deposit paid attractive rates, but interest rates for car and home loans were also sky-high. “Then it was a great time to be a saver, but a terrible time to get a loan. Now the shoe is on the other foot,” he says.
Last month the Federal Reserve reiterated its policy of holding key interest rates at “exceptionally low levels … for an extended period”—generally taken to mean an additional six months. These low rates mean banks can make a healthy profit lending funds to their very best customers at 3 or 4 percent, because they’re paying even less on certificates of deposit and money-market accounts.
As of March 15, the average annual interest rate on a CD nationwide was 1.348 percent, according to Bankrate.com, while an average money market was yielding only 0.883 percent.
How to cope with such low rates?
- Bonds. One obvious course is to transfer some money market funds into highly rated municipal bonds, which now often pay 3 to 5 percent in annual interest. While such bonds do carry the possible risk that the issuing entity could default, most investors probably won’t lose sleep over the notion that the Los Angeles Community College District or the Florida Housing Finance Corp. might fail to pay their debts. Another possible risk: Bonds can decline in value if not held to maturity.
- High-yielding stocks. Some equities still pay a 3 or 4 percent dividend, offering a retiree a better return than a savings account. But such investments carry the risk that the price of the stock could drop, leaving the investor with less money when it’s time to sell.
- Government-guaranteed mortgage security funds. One low-expense Vanguard fund, for instance, invests primarily in bonds from Ginnie Mae, the government-backed mortgage guarantor, and was recently yielding 3.71 percent.
- Reverse mortgages. These are controversial, in part because of hidden fees and loan terms. But a reverse mortgage generally allows people 62 or older to convert the equity accumulated in their houses into a tax-free stream of cash, without reducing Social Security or Medicare payments. These loans are repaid after the owner dies or moves. However, the collapse of real estate prices may have closed the door on this option for many.
Retirees subsidizing the banks
The nation’s retirees are essentially financing the nation’s massive bailout of banks, notes Edward Yardeni, former chief investment strategist for Deutsche Bank Securities and now an independent analyst. “It’s a Main Street subsidy of the whole banking system, that’s for sure,” he says.
“One of the main reasons the Fed lowered rates to zero was to create a very profitable spread for the banks, to help bail them out at the expense of depositors,” Yardeni notes. “That’s not a political view; it’s a matter of fact. So anyone who has money in a bank or money market fund is getting almost nothing for their investment, and that’s unsettling.”
Indeed, because so many older Americans want to preserve capital and avoid risks, Yardeni says, “we’ve seen a record inflow of money into bond funds,” where the investor must shoulder the potential risk of a default or capital losses.
Jon Wax, a certified financial planner in Tampa, Fla., says many of his clients nearing retirement wonder how they can find a stable source of long-term income once they stop working.
“There is a natural tension between wanting to see the backbone of our economy solidified and recover and the sacrifices people are making in terms of the lack of yield on safe investments,” he says. What’s important, he adds, is to try to help customers differentiate between monthly cash flow and longer-term performance.
For growth, take a little risk
That translates into getting older investors to hold part of their assets in a low-yielding money market fund to pay for monthly needs, while also putting long-term funds into somewhat riskier investments, such as stocks, which should ultimately bring higher returns.
Wax is also reminding clients that they shouldn’t expect the next recovery to trace the rocket-ship trajectory of past rebounds that brought high growth, rising real estate prices and surging stocks.
“We are conditioning everyone to understand that the ‘new normal’ may well mean sluggish growth,” rather than a rapid recovery, he says. He also warns that one possible consequence of all the cheap money flooding the banking system today could be rampant inflation down the road.
Back in Minnesota, Haynes notes that while government has pronounced inflation all but dead for the time being, her property taxes, heating bills and insurance premiums continue to go up. “I feel that our economy is floating around in smoke and mirrors,” she says.
As for the dwindling return on her retirement funds, Haynes says that “what used to be a healthy supplement to your Social Security is done.”
“It costs me $4,000 a month to live … and now I’m bringing in only about $2,000. My expenses continue to climb, and my income has shrunk to virtually nothing.”
“The banks are getting loaded on us,” Haynes continues. “They’ve got our money, they get overnight loans at zero percent interest and they are not loaning money out the way it’s supposed to be. They are taking total advantage of us and we’re not getting anything back, and I’m angry.”
Michael Zielenziger writes on business and the economy. He lives in the San Francisco Bay area.