WASHINGTON May 15 It isn't like Federal Reserve Board Chairman Ben Bernanke and his colleagues have it in for old people - I'm sure they are all very respectful of their elders. (The policy-setting reserve bank presidents typically have to retire when they are 65. Bernanke is 59.)
But their policy of holding interest rates as low as they need to be to keep the economy in modest growth mode is also hitting Grandma and Grandpa particularly hard: At ages when most people try to keep their money "safe" in bank certificates of deposit and bonds, retirees are having to contend with returns that would be considered laughably bad if they didn't have to cover groceries and Medicare co-pays.
The national average interest rate on a one-year CD is 0.25 percent, according to Bankrate.com. Ten-year Treasury notes are yielding less than 2 percent.
Fed watchers expect the Fed to keep buying bonds and holding rates low for at least another year and possibly longer. New research from the Employee Benefit Research Institute shows that if those low rates were to continue permanently, more than a quarter of baby boomers and generation Xers would not be able to meet their retirement budgets.
Of course, that is a highly unlikely scenario. Interest rates have never stayed in one place forever, and there's no reason to expect the current scenario will last. But the EBRI research is instructive, and even a short-term loss of yield can hurt when health care costs continue to outstrip the Consumer Price Index.
There is something worse than not making much money on your savings - it's losing those savings. Retirees desperate to match the higher yields they thought they were going to have are taking more risks and are at risk - for more than one reason.
"Many of these people are going so far out on the risk spectrum, I fear some of them have totally lost touch with what were once well-laid plans," Jack VanDerhei, research director of EBRI, told me in an interview.
Furthermore, retirees are targets of a financial services industry that is constantly offering new and complex "solutions" to the low-rate dilemma. Many of these "solutions" carry their own risks and can be fee-laden.
What's an income investor to do? Here are a few thoughts.
-- Go back to basics. Review your allocation - the percentage you keep in stocks and the percentage you keep in bonds and cash. Even if you are an oldster (define that for yourself), you can't afford to keep all of your money in CDs, bonds and other fixed-rate investments. If you assume that you're going to live for at least five years (or you want to leave money to your kids), then you still need to keep money diversified into other less nominally "safe" areas, like stocks, real estate and foreign investments.
-- Remember that every stretch is a risk. Buying stocks and cashing dividend checks for income can be more rewarding than bonds, but those shares could lose value. Using mutual funds to buy more arcane bonds - those issued by foreign governments or low-rated companies, - can get you more yield but higher risks of default. Buying longer-term bonds and CDs to squeeze out more return will cause you problems when rates rise and you can't get your money back to buy a new higher-rate instrument. Don't avoid all of the above, just spread the risk around. The more different income-producing types of investments you have, the less likely they are to all head south at the same time.
-- Beware of "solutions" you don't understand. Locking in a long-term return when rates are at historic lows doesn't seem like a good idea, yet that is what fixed annuities and similar insurance products offer. New multi-asset and "go anywhere" mutual funds - designed to give fund managers the broadest possible leeway in bond and other markets in the search for income - can carry high fees without eliminating all those risks mentioned above.
-- Spend less, and keep the faith. VanDerhei prefers the unpleasant advice: If you're earning a lot less than you expected to, cut your budget. His simulation found that if retirees whittled 10 percent or 20 percent off of their retirement expenses, their failure rate under the low-rate-forever scenario fell from 27 percent to a maximum of 8 percent. That will preserve more of your principal for when interest rates do rise, and you can start collecting more income again.
After all, if you are old enough to be retired now, you remember when the prime rate was over 20 percent, and experts agreed we would "never again" see single-digit mortgage rates.
Anything can happen, so keep your powder dry.