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Low CD rates sabotaging retirement?

By Claes Bell, CFA · Bankrate.com
Monday, June 11, 2012
Posted: 5 pm ET

Are low interest rates, including low CD rates, causing you to put off your retirement? If so, a new survey suggests you're not alone.

The latest Wells Fargo-Gallup Investor and Retirement Optimism Index shows many U.S. investors see low CD rates as a barrier to retirement.

From the press release:

One in 3 investors (33 percent) say low interest rates will cause them to "delay" retirement. Forty-five percent of nonretired Americans and 34 percent of retirees fear that current low interest rates may cause them to "outlive" their money in retirement. A little more than a quarter (26 percent) of nonretired and 19 percent of the retired say low interest rates will cause them to put money in investments they "might have avoided." Thirty-two percent of investors think today's low interest rates are likely to lead to a sharp increase in inflation in the years ahead.

"A year ago, retired investors were three times as optimistic as working Americans, and now retirees are less optimistic, which may be attributed to how challenging it is to have any kind of growth in savings. Our questions on interest rates show the impact low rates are having -- they are challenging for retirement nest eggs, particularly when core inflation rate growth is about 3 percent a year and CD rates are yielding less than 1 percent. Some people may feel like they're pushing mud up hill," said Karen Wimbish, director of retail retirement at Wells Fargo.

Nonretired investors say lower interest rates are good for consumers and businesses, and the "benefits outweigh the costs" by 73 percent to 22 percent. Retirees are more evenly split, with 47 percent saying "benefits outweigh the costs" versus 43 percent who do not.

This study confirms a lot of what I've been hearing anecdotally on the impact of low CD rates on seniors. While homeowners and the jobless have often grabbed the spotlight in the last few years, many retirees are between a rock and a hard place: They can either spend through the principal they have to live on for the remainder of their lives, or face a sharply declining standard of living because the CD yields they depend on for income are dwindling away to nothing.

What's more, there's little hope of CD rates coming back anytime soon. With Europe looking like it's sliding into recession, it's likely we'll see more monetary easing, not less, from the Fed. That will likely help keep CD rates low for the foreseeable future.

The other interesting data point here is the divide between retired investors and nonretired investors in terms of whether all this monetary easing is worth it. While I can understand why seniors who have been impoverished by ultra-low interest rates feel the way they do, it's worth looking across the pond at the eurozone, which has largely been less aggressive that the Fed with its monetary policy. The U.S. may not be exactly be an economic dynamo right now, but I'd rather be here than Spain or even Germany any day of the week.

What do you think? Are low CD rates a reasonable price to pay for economic recovery?

Follow me on Twitter: @ClaesBell.

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1 Comment
john
June 11, 2012 at 10:16 pm

the banks are at fault for lending money to people who couldnt pay their mortgages and NOW they are taking it out on their depositors--they are thieves and people should revolt--1 percent on a cd is assenine