7/3/2013 8:45 PM ET|
6 ways the Fed hurts retirees
The Federal Reserve has kept interest rates very low as the nation slowly emerges from the Great Recession. But that move has hampered people who live on fixed incomes.
In late 2012, Federal Reserve Chairman Ben Bernanke fessed up and revealed the worst-kept secret in finance: The low rates the Fed has maintained in an attempt to ignite the U.S. economy are badly hurting retirees and others who rely on fixed income.
"My colleagues and I know that people who rely on investments that pay a fixed interest rate, such as certificates of deposit, are receiving very low returns, a situation that has involved significant hardship for some," Bernanke said in an October speech in Indianapolis.
Such sympathy is probably small consolation to millions of Americans who saved diligently over the years but now find themselves struggling, thanks to rates that have remained near zero percent for more than four years.
"Our firm has long been of the belief that artificially low interest rates have punished savers and retirees," says Samuel Scott, president at Sunrise Advisors in Leawood, Kan.
"We heard someone say that the 'haircut' to depositors by Cypriot banks pales in comparison to the 'theft' by Bernanke and the Fed from savers."
How does Fed policy hurt retirees? Bankrate counts six ways.
1. Paltry returns on savings
In June 2006, the federal funds rate stood at 5.25%. At the Federal Reserve's meeting in September 2007, it began lowering the federal funds rate and continued to do so until it fell to a range of between zero and 0.25% in December 2008. It remains there today.
Rates on certificates of deposit, money market accounts and savings have plunged in tandem.
The result has been devastating for retirees counting on safe, fixed returns, says Michael Rubin, founder of Total Candor, a financial planning education firm based in Portsmouth, N.H.
"They're earning a lot less on their savings than any other time in recent history," says Rubin, author of "Beyond Paycheck to Paycheck."
Despite such low returns, CDs and other savings vehicles still have a place in a retiree's portfolio. Even getting a sad-sack 1% return is better than exposing all your savings to higher levels of risk, says Alan Moore, founder of Serenity Financial Consulting in Milwaukee.
"I look at cash as market insurance," he says. "When the stock market takes a dive, [retirees] don't want to be in the position of having to sell stocks to fund their lifestyle."
2. Low rates on fixed annuities
Many retirees buy an annuity in hopes of getting a safe stream of income. Low rates undercut that strategy, Moore says.
"The problem is that the monthly income a client receives from their fixed annuity is based on interest rates at the time they purchase the annuity," he says. "With interest rates at all-time lows, annuity payouts are also at all-time lows."
Nathan Kubik, a Certified Investment Management Analyst at Carnick & Kubik, which has offices in Denver and Colorado Springs, Colo., agrees that now is among the worst times to buy an annuity.
"Locking in these historically low rates right now through fixed-rate annuities is the height of folly," Kubik says.
Kubik suggests talking to a fee-only adviser who is an expert in fixed-income investments. Such a pro can suggest alternatives to annuities.
Meanwhile, Moore urges investors to avoid purchasing annuities until rates climb.
"Another option is to buy a smaller annuity today, such as 25% of what [investors] would normally buy," he says.
Doing this several times from different companies over a few years allows you to buy at various interest rates, he says. Plus, buying from separate companies protects you if one of the companies goes bankrupt.
3. Underfunded pension funds
Today's pension funds are in big trouble. Ninety-four percent of corporate defined benefit pensions were underfunded in 2012, according to a recent report by Wilshire Consulting.
Pension funds must make sure their assets grow at a pace adequate to cover future liabilities. The Wilshire report notes that today's low interest rates make this especially difficult to achieve.
"It is putting pressure on the already-weak pension system," Scott says.
But Rubin notes that pension woes are unlikely to affect large numbers of retirees. "Most retirees don't have pensions and will not be affected," he says.
He also believes that current pension recipients are unlikely to see their payout cut. But future retirees may not be as lucky, he says.
Moore agrees. "It is hard to know if clients can depend on them for their retirement income," he says. Workers who are worried about their company's pension plan must take action now. "They need to save more or work longer, as well as delay Social Security, to maximize the benefit they will receive."
More from Bankrate.com
VIDEO ON MSN MONEY
The part about hurting retirees makes you half right. But, the worst-kept secret is that it was never about igniting the U.S. economy. It was always primarily about bailing out and benefiting the largest banks and financial companies which employ some of the wealthiest people in the world. It still is today.
OH? This is surprising news? For many, many retirees who did the right thing all of their working lives and saved and relied on a formula of interest that has been in a stable range for many decades, this has been devastating. Most of us have already lost tens of thousands of dollars and it's not over yet. Berjerky sympathy is not a resolution to what is outright theft.
Then you compound it with these fecal exits like Paul Ryan who want to devastate, if not destroy, Social Security and Medicare and you begin to understand the validity of the political ad showing grandma being pushed off the cliff in her wheelchair.
And I am tired of all the whining from this current generation who think that their problems all have to do with retired people. We had to work, save and sacrifice to get where we are.
I wish I could find the right PAC of retirees in the same boat. We are a growing population and we MUST gang up on these pukes in Washington.
So basically all the article is saying that there is only ONE thing hurting retirees and savers
THE GD FED!!!!!!!!!
I would love to see Bernake the puke strung up on NATIONAL TV AND THE WEB!!!!
It might show all the other a$$holes that think they know how to run an economy [THEY DON'T] what can happen when they try to SCREW regular working people. They've told us for years to save, save, save, because they've been screwing with social security, we DID save and now the FED is screwing us out of BOTH.
Bernake, I hope you die in poverty on the street, with people telling you should have worked harder and saved more
You didn't mention the phantom tax on low income retirees. The threshold for paying taxes on Social Security was set in 1981 at 25,000 for a single or 32 thousand married. It has never been adjusted for inflation in 32 years. Every year more and more Social Security recipients are captured by this artifically low threshold which amounts to a "silent tax increase".
In fairness, it should now have a threshold of about 50,000 single and 64 thousand married before any taxes are paid on SS.
At one point we thought we could draw 5% interest off of our 401k each year and let the rest grow for emergencies, .but then the market crashed leaving us with less money to draw interest on, plus interest is not even worth investing for, now. We have pulled our money out of the 401K and paid taxes already. We did it over 5 years to stay in a low tax bracket, but still a lot of it went to taxes.
Apparently they think everything is hunky dory as long as the wealthy don't have to pay taxes on the big bucks they draw while setting on their butts. I don't have any loyalty to our leaders.
Bring that overseas competition on!
I don't care how this comes out, if I can buy overseas rather than our big businesses here, I will.
I would buy from an insane China man before I would buy from GE. They are buying labor overseas....turn about is fair play.
We all built this county and the rich are grabbing the fruits of everyone's labor. America could only work with decent people running the country.
Ben is trying to make the dollar worthless. That is how he will pay off the china debt. They apparently don't print enough to pay interest to savers. That would put Social Security in good shape. They don't want that either.
It reminds me of "Oh what a tangled web we weave - when we first try to deceive."
We need to stop this name calling and insulting each other, and get to the root of the problem the POLITICIANS, of both sides. They are interested in one thing only, their personal agendas, (which includes getting reelected to their cushy, current, lifestyle.) Not one of them, in ANY party, is truly interested in we, the taxpayers of this nation. (And that includes retirees now paying more taxes than when they were working.)
The cost of living has risen so high, yet they are reducing the index for computing cost of living, they are taking more money from the younger people. Yet, they are ALL sending jobs overseas, instead of bringing more work INTO the country. All the jobs being created are "service industry," minimum wage jobs, and most of them are part time, or seasonal.
Wife and I were out around noon, and I overheard a young man telling a young friend of his, :"Got my degree, and thought this job, with an engineering company, would enable me to use it. Maybe even get a decent salary out of it. What am I getting? $9.00 an hour, but lucky enough to have a full time job, with limited benefits."
Both my oldest granddaughters are working two part time jobs, one going to college, paying her own way, including her school bills, and we can't help either of them, as we are already on a fixed income. What is wrong with us? Whatever happened to the "American Dream?" I know what it is. Corporate greed, (and that includes those elitists in Washington, D.C., ALL of them.) And we are so busy arguing amongst ourselves, we let them get away with it. It is time to throw the "bums" out, and start with a fresh slate, one where the people we choose, remember who their EMPLOYERS are.
Quit the "empire building" and get back to working for US.
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
The Fed's latest statement confirms that it won't be coming to the rescue of depositors soon, but these institutions are worth following anyway.