While many—mainly borrowers—have been pleased with the Fed’s downward pressure on interest rates, the program is placing many retired Americans’ long-term security at risk. Interest rates are at their lowest point in 100 years as the Federal Reserve tries to stimulate the economy and decrease the unemployment rate.
Although these efforts appear to be working, the low rates are having the opposite affect on savers. Currently, a 10-year Treasury note is yielding just 1.7 percent a year, and a one-month Treasury bill just .05 percent in a year’s time. At that rate, an investor in one-month bills would double his or her money after 1,387 years. According to Bloomberg, when including 2-percent inflation, an investor would actually lose money invested in Treasury securities.
Federal Reserve chairman Ben Bernanke knows he is unpopular with savers and those trying to live off of interest income. But he argues that the low-interest-rate policy is the best medicine for the struggling economy.
In an October speech before the Economic Club of Indiana, Bernanke acknowledged that low rates involved significant hardship for some,” but explained that raising rates prematurely would result in a domino effect, resuming declines in home prices and business values and increasing the unemployment rate. “Such outcomes would ultimately not be good for savers or anyone else,” he said.
Senior citizens are likely impacted the most by low rates, according to Manhattan Institute fellow Diana Furchtogott-Roth, the 75-and-older crowd gets 8 percent of its income from interest dividends and rents, compared to those younger than 44 who get just 1 percent of their income from the same sources.
Sustained low interest rates put retired Americans at risk of exhausting their savings earlier than expected, according to the paper “Should Americans be Insuring Their Retirement Income?” Although Social Security and traditional pension plans offer protection against risks such as low interest yields, market volatility and longevity risk, personal savings and company-sponsored 401(k) retirement plans are susceptible. The paper, published by Prudential Financial Inc., suggests Americans insure their retirement income through products such as guaranteed income protection or individual annuities.
“While the majority of Americans insure their most valuable assets in order to safeguard against significant financial loss, many don’t think to insure their ability to generate lifetime income,” said Bob O’Donnell, president of Prudential Annuities. “Today’s guaranteed income products were designed to help protect retirees from running out of income in retirement, regardless of market conditions or increased longevity.”
Other experts advise Americans to take more risks with their investments than they may have in the past.
“Don’t fight the Fed,” Larry Elkin, a certified financial planner and president of Palisades Hudson Financial Group in Scarsdale, N.Y., told Bloomberg. “You’re bringing a rock to a gunfight.”
Investment sources that yield more income include dividend-paying stocks—the average yield in the Standard & Poor’s 500-stock index was 2.2 percent on Dec. 12—or real-estate investment trusts—a Bloomberg REIT index had a 3.5-percent dividend yield as of Dec. 12. According to Bloomberg, mortgage-backed securities, emerging-market debt and high-yield bonds experienced the largest recent gains in assets.
“One of the things that we hear out of clients is, ‘Just give me a safe, high-yielding investment.’ We tell them, ‘That doesn’t exist,’ ” William Allen, vice president for portfolio consulting at Schwab Private Client Investment Advisory, told Bloomberg. “If you want pure safety you have to give up some yield, mostly all yield. We spend an awful lot of time trying to level-set investors”—that is, lower their expectations.”
For those on a fixed-income and leery of risking their nest eggs, corporate and municipal bonds offer better yields than Treasuries. The FINRA-Bloomberg Active Investment Grade U.S. Corporate Bond Index yielded 3.4 percent on Dec. 12—2.7 percent higher than the benchmark five-year Treasury note. And although municipal bond yields are at 47-year lows at 3.3 percent—the average for 20-year Aa2-rated general obligation bonds Dec. 12, according to Bond Buyers—they are still higher than Treasuries.
