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?