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CD rates hurt savers; retirees

By Sheyna Steiner ·
Wednesday, March 23, 2011
Posted: 3 pm ET

With enough of a nest egg a retiree could live off of the interest from CDs alone. These days, however,  that nest egg would need to be the size of Texas to provide a reasonable income.

While most financial advisers would likely recommend against putting all your retirement eggs into one basket, CDs will always be in demand as they are very safe, thanks to the Federal Deposit Insurance Corp. guarantee, easy to buy and easy to understand.

I spoke with Daniel Penrod, senior industry analyst with the California Credit Union League, about the fallout he's seen from savers grappling with low CD rates.

"A lot of the larger CD investors are those that do it for an income purpose, they basically treat it as an annuity," Penrod says.

Annuities are insurance products that provide a steady stream of income payments over a period of time.

Income investors have seen CD rates go from a 5-year rate of 5 or 6 percent to a 5-year rate of around 2.5 percent. CD rates began falling in 2007 as the Federal Open Market Committee began slashing short-term interest rates. The intended federal funds rate has been 0 to 0.25 percent since the end of 2008.

"That's a stiff drop for someone who had planned their retirement on a 4 to 6 percent return," says Penrod. "Most can withstand a 6-month or 1-year or maybe 18 months drop in income, but we're talking years of rates being on the floor."

In many ways it's caused retirees and those nearing retirement to drastically alter their mindset as well as their expectations.

"Some people have had to go back to work, for instance, picking up part-time work to make sure that their retirement funds hold," Penrod says.

Others with well-funded retirement accounts have been able to switch from a focus on income to reducing debt. "They're saying, 'if I'm only getting 2 percent on this, maybe I should be paying down an auto loan or some other form of debt instead of trying to look at it as income,'" he says.

And many people have abandoned CDs altogether.

"What we've seen is a return to the money market style, money markets in terms of financial institutions, not investments. They are liquid like a savings account, but if you reach a certain threshold, then you get a little bit of a rate bump at each tier. Most are $10,000 and beyond for a tier and some are reaching into the $50,000 and $100,000 tiers to get a full point bump over a savings account," Penrod says.

For savers still clinging to the CD market, any crumbs of a rate increase are enough to spur action.

"The market is changing in terms of what the depositor is willing to accept and is looking for," says Penrod.

"(CD investors) haven't been rate sensitive until recently, but we're looking at people who are starting to make moves with their CDs or their dollars over a quarter of a percentage point. When before it would take at least half a point to a point difference before people would make moves. People are making a 10 basis point move. If you work the numbers out it's not that big of a change, but they are scrambling for any additional increase," he says.

What would it take to get you to buy a CD today?

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blues boy
April 05, 2011 at 3:32 am

the whole game is about getting people in debt. . the central bank the gov't views saver's just like the credit card co.s deadbeats. what got this country in this mess was credit so what do the powers that be think will get us out MORE CREDIT.every one in this country has got to realize you can't have it if you don't have the money... bernanke thinks he can revive this economy on the back of savers he's got a better shot at a full head of hair.

Edward Hellekson
March 26, 2011 at 12:23 pm

I agree totally with Frank's comment and I will add: It seems to me that we have political appointees to jobs in the financial field in government who are absolutely unqualified for the positions they hold. If each and every one had to take the civil service exam for these positions, they could not pass the test. However, as a politician, they are simply handed the job, unqualified for it, and all they have to do is "keep kicking the can down the road" until judgement day (bankruptcy). Now wait one minute- Iknow I am not a political correct person and "bankruptcy", perhaps, should not have been mentioned but the truth should not be ignored. I have carried in my checking account for 5 years the sum of $18,000.00 and not one cent of interest and I will assume the bank made at least 6% on it meanwhile. Reason? I, at least have access to it in time of need.

Hoyt Brown
March 26, 2011 at 9:45 am

Remember when cd rates were 15%. You could buy a 10 year cd for 15%. What Happened now you get 2%.

March 26, 2011 at 7:35 am

Unlike stocks and bonds, funds placed in CD accounts are labeled "safe", and many employees have plunked the bulk of their retirement savings into CD's through traditional or Roth IRA's only to learn now that the interest rate is at least 1% below the actual inflation rate. So, their "safe" CD's are evaporating at a rate of 1% per year. To make matters worse for current retirees, the FED stipulates that because the inflation rate (as they calculate it) is 0%, retirees will see no cost of living increase in their social security income. Go figger. Frank is right. It is time for those guys, the Fed, central bank, People robbers, to go!

March 24, 2011 at 9:47 am

This attack on retires CD accounts started way before 2007. There has been an attack on savers for over the last 30 years. Everything coming from the Central Bank has been to prop up the stock market. Saver have been punished because of this policy to try to force people to gamble on stocks.This is how this Whole Bubble Game started, and it has not stopped. Now being that banks can get money for nothing from the central bank. There is no need to pay Depositors anything. You can not afford to keep your money in the bank. You will lose money as long as it is in the bank.Inflation is always 2 to 3%. You can get 3% on your money. So you are losing 1% or more of your money as it sits in the bank. This policy has to stop! We are being robbed blind! There will be a price to pay for this big mistake. by the central bank. The people will not forget this. Your days are numbered ( The Fed, central bank, People robbers). We will end you your crimes on the public. Time for you guys to get a new job. Maybe dog catchers?