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When CD rates get personal

By Claes Bell ·
Monday, August 20, 2012
Posted: 5 pm ET

It's pretty much a given at Federal Reserve Chairman Ben Bernanke's quarterly press conferences these days that someone will ask him about the plight of savers, and it's also a given that Bernanke will express some sympathy while patiently explaining that it's in everyone's best interest for the economy to recover, and low interest rates will help that happen more quickly.

A lot of readers and financial services professionals that I've heard from lately are upset about historically low rates on certificates of deposit. Part of that distress is a result of practical concerns. Lower yields on their nest eggs means a lot of retirees must either dip into their savings or accept a drastic cut in living standards as a source of income they once relied on dries up. Worse, since many living on savings yields are retired, they aren't likely to get an opportunity to replenish their nest eggs. What's gone is gone.

But I think the anger over low CD rates goes deeper than that. There's a concept in investing called the "time value of money." At its root, it's the simple idea that because of the opportunity to earn interest in a modern economy, money will almost always be worth more later than it is today. That means that for every dollar you spend on that vacation in the Florida Keys or that dinner out today, you're actually giving up the two dollars you could have earned in a few years had you saved and gotten interest on that money instead.

Under those rules, the prudent thing to do is sacrifice present consumption for the opportunity to secure a better financial position in the future. But as anyone who's saved a substantial amount of money on a limited budget can tell you, that's easier said than done. In fact, I'd bet a lot of savers are looking back on the sacrifices they made over the years to amass their savings -- all the forgone vacations, the unbought clothes, the beat-up cars -- and looking at their account statements and asking, "1 percent on a five-year CD? This is why I celebrated my 30th wedding anniversary at Shoney's? This is why I drove a Mercury Topaz for 12 years?"

There's a sense out there, I think, that the Fed and Wall Street have switched the rules on people. Hard work and the sacrifice of creature comforts used to be sufficient to guarantee a certain level of financial security. But with savings yields so low that they're falling below inflation in some cases, there's little to no cost to spending and a very real cost to saving. It's as if the ants in the old fable went down into their hill only to find the corn they'd so carefully squirreled away was covered in poisonous mold.

Ultimately, most economists would tell you that raising the federal funds rate right now would be a disaster, and that the low value of Americans' savings is due in part to the lack of demand for, or return on, financial capital right now in the economy. But that doesn't make it any less painful.

What do you think? Have low CD rates hit you hard? What have you done to cope?

Follow me on Twitter: @ClaesBell

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August 25, 2012 at 1:38 am

A well written article truly discribing the feeling of savers plight. Low interest rates not only hurt those on a fixed income but also anyone that does take cuts in their budget for entertainment to put that money away and it earns 1% annual return. The Fed needs to stop manupulating interest rates and let the free market dictate what they should be. Clearly, without them purchasing bonds there's already a huge appetite for Treasurys which is already dispressing interest rates

August 22, 2012 at 10:39 am

The low interest policy of the Federal Reserve has had a profound impact on my total retirement income which has been reduced by 35 percent. This results in less spending on my part to help spur economic growth in this country. I guess the goal of Bernanke's Fed is to force savers out of deposit accounts and into riskier dividend yielding equity investments. Unfortunately, when the next market correction or crash occurs most of us will be just too old to recoup our losses. Of course the Wall Street financial institutions will make out just fine one way or another.