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
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
-- 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
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.