For savers and investors living off interest income, typically retirees, low CD rates are a major problem. For people whose working days are behind them, persistently low interest rates have resulted in drastic reductions of income. In order to increase returns, many retirees have been forced to take on more risk in their investments but with a finite amount of resources. And losing money on a sour investment is something few can afford to do.
I recently e-mailed a couple of financial advisers to ask about their strategies for dealing with low CD rates and their experiences working with CD investors.
"Working with many seniors and retirees, they are choosing to do nothing. They have been taking it on the chin for over two years now, and suffered essentially an 80 percent pay cut over the last five years. And it looks like nothing is going to change for some time as the Japanese quake / tsunami / meltdown and higher gas prices work to stall the economy and encourage the Fed to keep rates ultra-low," says Robert Laura, president of SYNERGOS Financial Group near Howell, Mich.
For the diehard CD investor, he recommends going online to find high-yield CDs.
"ING and Ally offer rates that dwarf local banks and credit unions. The issue here is that some seniors aren't comfortable with the Internet," says Laura.
His second recommendation is to invest in dividend-paying stocks, but concerns about loss of principal keep many from taking the risk.
"So they end up hoping and cutting their medication in half," he says.
Louis Berger, principal and co-founder of Washington Square Capital Management in New York City, recommends fixed-income alternatives to CDs and sticking to very short maturities.
"We have looked at high-quality, taxable municipal bonds as an income option in lieu of CDs. We also have considered Treasury inflation-protected securities, or TIPS, floating rate bond funds, and some variable-rate corporate notes. We have been avoiding long-term bonds and CDs and staying on the very short end," he says.
"If given a choice, we think CD investors may be better off biting the bullet and taking the lower yield on short-term CDs rather than chasing yields on the longer end of the curve -- 5-, 10- or 15-year issues -- particularly if they may need access to the money prior to maturity," says Berger.
What do you think? How have low CD rates affected you?