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Low CD rates continue to hit seniors

By Claes Bell, CFA ·
Monday, October 24, 2011
Posted: 4 pm ET

These days, the safety of FDIC-insured CDs comes at a high premium. Donna Gehrke-White of the South Florida Sun-Sentinel had a troubling article last week on how low CD rates are impacting seniors. From the article:

Retiree Joan Siegel, 75, of Hallandale Beach, Fla., is afraid that piddling interest on the federally insured bank accounts she holds won’t keep her afloat, even with her monthly Social Security check to help.

A recent bank statement scared her: She earned just $1.36 in interest from one of her main accounts.

"It's getting down to the point I won’t have anything left," said the former company vice president. "I don’t know what tomorrow will bring. It’s extraordinarily scary."

Yields on certificates of deposit and savings accounts have fallen for four years. Last month, the Federal Reserve announced a plan to push long-term interest rates lower by selling shorter-term U.S. Treasury bonds and buying longer-term ones. That’s on top of the Fed declaring it will keep two key short-term rates low until 2013.

I think a lot of people can relate to Siegel's situation. These are tough times for people living on investment income. The CDs and bonds that many retirees once depended on to supplement their Social Security income are now yielding, as the article notes, about $400 per year on a $100,000 investment.

Making matters worse is the dearth of reasonably safe alternatives. Stocks have been so brutally volatile in the last decade that those living on finite retirement funds hesitate to take a chance that a double-dip recession will hit their portfolio again. Treasuries and other bonds are sporting incredibly low yields not much better than CDs.

So what's a retiree to do?

I think that if the alternative is digging into your principle every month to cover your basic expenses, then it might make sense to look at putting part of your savings into dividend-paying stocks. Many U.S. companies are fairly profitable these days, and have been more willing to pay dividends of late than invest money into expanding their operations. Sure, your principal won't be protected the same way a CD account balance is, but they do offer the hope of higher investment income.

The other alternative is to take the plunge into Internet banking. While it may seem a little scary to entrust your money to a banker you've never met, the difference in yields between CDs at conventional banks and online banks can be the difference between earning $400 on $100,000 and earning over $1,000 on the same principal. That can be a life-changing difference for seniors who are struggling to make ends meet without eroding their savings.

What do you think? Are you experiencing hardship from low CD rates? What do you think struggling seniors should do to avoid digging into their retirement nest egg?

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end the fed
October 29, 2011 at 2:20 am

Once again government intervention in the market has terrible unintended consequences. Easing of interest rates is needed in economic downturns, but this prolonged near zero interest rate enviroment that's been going on for the last 3 years, and will still be here for at least another 2 is crushing seniors and others on fixed incomes. It also opens the door for rampand inflation and deincetivizes saving. If there's one lesson that should been learned from the last credit crisis, it's Americans need to save more and borrow less, according to the Fed though, that behavior hurts growth.

Blonde Arsenal
October 28, 2011 at 8:20 pm

Without the interest growing on the CD's and IRA's there is no money growth . How can the economy recover without the spending and growth of money? The banks can't recover with giving a 4% interest mortgage for 30 years.

Plus every time the interest rate dropped, the builders of homes tacked on thousands of dollars to the price of the same home. The low cheap money fueled the banking crisis with no over site. The seniors will have to pay for the banks errors and the reckless people who bought a too big house they couldn't afford.

October 25, 2011 at 7:22 pm

I personally don't recommend dividend stocks. The most I would do in the stock market is a short term bond fund but even they can crash if the wrong economic occurence happens. The stock market to me is extremely risky. I just skimmed a book by a stock expert with a super stock picking formula but he even said the market belongs to the experts. It is too risky! You have to shop the U.S. for the best CD rates...that is a must! The only place I spend now is at the grocery store where I have become amazingly creative with food Thank the heavans for the library where you can get top notch entertainment in books and films. My new motto is "I can adjust to anything" as things have been so rough with the super gloomy economy!!

October 25, 2011 at 7:20 am

So Al Attard, how do you suggest that senior citizen (featured in the article) should start spending to help spur the economy? You don't think that case could very well be the case of a huge percentage of those 50 million seniors? And I'm not talking "baby boomers" who retired with their comfy little pensions from working 30 years at the company and just NOW became senior citizens... I mean, the older ones, the ones most likely to have Social Security as their sole income.

How do you suggest they start spending on the economy when they have so little already?

Sure, it always sounds nice to say "It's about spending", but how do you apply that principle? A bigger chunk of people's paychecks are being spent on higher gas prices (compare October 2009/2010/2011 for a glimpse) and higher prices on food (and other necessities).

Al Attard
October 24, 2011 at 8:42 pm

Banks and the Fed are making a big mistake keeping CD rates at these low levels. In the 50's saving rates could not go below 4.5% by law. This encouraged savings as well as enabled people to spend a little on themselves and gave the economy the juice to keep growing. If they think low rates will help the crashed housing market look at the recent history. Housing prices after three years are still falling, with no end in sight. The banks are not willing to loan out money unless you have an 800+ fico score. If 50 million senors are not willing to spend the economy will never recover. No job growth will occur. It's all about SPENDING and developing new jobs-that's the only way to fix the mess we are in.