4/13/2011 12:10 PM ET|
Low interest rates crack nest eggs
Federal Reserve policies aimed at stimulating the economy have many retirees worrying that their savings won't see them through.
Forrest Yeager, a 91-year-old resident of the seaside community of Port Charlotte, Fla., had been counting on his retirement savings to last until he died. The odds are moving against him.
With short-term bank CDs paying less than 1%, the World War II veteran expects his remaining $45,000 stash to yield just a few hundred dollars this year. So he's digging deeper into his principal to supplement his $1,500 monthly income from Social Security and a small pension.
"It hurts," says Yeager, who estimates his bank savings will be depleted in about six years at his current rate of withdrawal. "I don't even want to think about it."
Yeager is among the legion of retirees who find themselves on the wrong end of the Federal Reserve's epic attempt to rescue the economy with cheap money.
A long spell of low interest rates has created a windfall of billions of dollars for banks, mortgage borrowers and others it was designed to benefit. But for many people who were counting on their nest eggs, those same low rates can spell trouble.
Retirees are most vulnerable
Yeager's struggle highlights a nagging dilemma facing Fed Chairman Ben Bernanke. The longer the central bank keeps interest rates low to stimulate the economy, the more money it pulls out of the pockets of millions of savers. Among the most vulnerable are retirees, who have few options to restore lost income on investments built up over entire lifetimes.
In 2009, according to the most recent data available from the Labor Department, average annual investment income for the 24.6 million American households headed by people 65 and older amounted to $2,564. That figure is down 34% from 2007, and is the lowest since 2003.
A recent survey by the Employee Benefit Research Institute indicated that one in three retirees had dipped deeper than planned into their savings to pay for basic expenses in 2010.
Most economists agree that the Fed's interest-rate policies, together with other measures, have helped avert a much deeper economic slump. Still, the situation for savers has become progressively worse since the Fed first lowered its interest-rate target close to zero in late 2008.
As of January, the average interest rate paid on relatively safe vehicles such as short-term savings accounts, time deposits and money-market funds stood at only 0.24%. That's one-tenth the level of late 2007 and the lowest on records dating back to 1959. Such depressed rates don't come close to compensating for inflation, which was running at an annualized rate of 5.6% in the three months ended February.
"Americans who have done everything right, have worked hard, saved their money and stayed out of debt are the ones being punished by low interest rates," says Richard Fisher, the president of the Federal Reserve Bank of Dallas and a voting member of the Fed's policy-making Open Market Committee. "That state of affairs is not sustainable for a long period of time."
Potential political repercussions
The pain inflicted on savers could have political repercussions. Retirees are among the country's most active voters, with the power to influence a wide range of issues, such as who will bear the burden of fixing the federal government's finances and whether politicians should rein in the Fed.
Over the past few years, seniors have taken a conservative turn: In the 2010 elections, Republican congressional candidates attracted 59% of the over-65 vote, compared with 48% in 2008, according to exit polls -- a larger shift than that seen among the general populace.
To be sure, many retirees have no savings at all or don't recognize the extent to which interest rates affect them. The subject isn't at the top of their list of concerns, which include health-care costs and Social Security benefits, says David Certner, the legislative policy director at AARP. Still, he says, "we hear a lot of complaints from people who were counting on a certain return from their fixed-income investments."
VIDEO ON MSN MONEY
The newsmen and women, the politicians and the president wonder:
WHY DO THE PEOPLE NOT EXPECT SOCIAL SECURITY AND MEDICARE TO TAKE THE HIT IN THE BUDGET FIGHTS?
Well that is a tough one, but let me give it a try:
WE, THE PEOPLE PAY THE ENTIRETY OF THE REVENUE T THAT KEEPS THE EXISTENCE OF THE FEDERAL GOVERNMENT POSSIBLE AND ALSO ARE THE ONLY VOTERS (NOT CORPORATE OR LOBBY GROUPS) AND SOCIAL SECURITY AND MEDICARE BENEFITS .............THE MAJORITY OF US................ SO WE SAY DON'T MESS WITH THEM.................MEDICAID BENEFITS.......THOSE WHO PAY NOTHING FOR ANYTHING..............CUT IT AS NEEDED...............THE UNITED STATES MILITARY HAS BENEFITED .............NO ONE BUT CORPORATE INTERESTS AND HAS NOT DONE ANYTHING SINCE 1945 TO AID THE AMERICAN CITIZEN ..........EXCEPT IN DISPOSING OF OUR CHILDREN EARLY IN LIFE ...............CUT IT DRAMATICALLY AND IMMEDIATELY..........................NOT A TOUGH CONCEPT TO DIGEST!
WHAT SAY WE BRING ALL OF THE TROOPS IN NON-WAR AREAS BACK SO THAT THOSE ...BILLIONS OF AMERICAN TAX DOLLARS THAT WE PAY THEM ...............ACTUALLY BENEFIT THIS NATION AND ..........NOT FRANCE, ITALY, GERMANY, SOUTH KOREA, SPAIN, JAPAN..........................AND CRAZILY ENOUGH THEY MAY PURCHASE A HOUSE OR TWO .........AND MAYBE THEY COULD ACTUALLY GUARD OUR BORDERS AS WELL WHILE SAVING EVERY LAST DIME THAT WE SPEND MAINTAINING BASES IN COUNTRIES THAT ARE OR SHOULD BE CAPABLE OF GUARDING THEMSELVES???????????
While the biggest benefactor of the 0% rate by the Fed is the Fed.
This is wrong is so many ways. The biggest benefactors of the 0% discount rate are the banks that get loans from the fed at the discount rate.
Either Lead, Follow or GET THE HELL OUTTA THE WAY !!!!
Either Lead, Follow or GET THE HELL OUTTA THE WAY !!!!
The reality of it all is quite sad, and yes, seniors are taking a huge hit.. I've talked to a few seniors who simply don't get it. Save for that rainy day, except don't expect much in return.
Its sad seniors have to cope with never knowing how long that money will last. Some seniors don't know what to do, or where they will land up. Its not that seniors dislike longevity, its simple a matter of how long will the money last..
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