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?