Retirees lose out with lower interest rates
Bernice Rudick says she feels lucky she picked up a part-time job six years ago. If she weren't working now, the 83-year-old widow might be hurting even more after a bear market cracked into her retirement nest egg.
"Everything's gone down," said Rudick, who answers the phones a few days a week at Plymouth, (Mich.) Township Hall. She's particularly upset with lower dividend payouts and isn't interested anymore in low-rate certificates of deposit.
As it is, she's cutting back on spending here and there. One budget-trimming trick: she's stopped subscribing to some magazines, including Martha Stewart Living, Country Weekly and Southern Living. She enjoys magazines on cooking but can't afford too many, now that low rates are paid on her savings.
"You start watching things a little bit closer," Rudick said.
For all the buzz about how cheap money can get consumers to buy homes and cars and boost economic growth, there is a flip side.
Retirees and other savers who live on stock dividends and interest income from their savings have lost out big time in recent years. Companies such as Ford Motor Co. slashed their dividend checks.
And interest rates have fallen since the Federal Reserve began cutting short-term interest rates in January 2001. Lower rates left retirees and others who put most of their money in the bank with less cash.
"I've talked with a lot of retirees who are pretty angry about it," said Diane Swonk, chief economist for Bank One in Chicago. "They aren't too happy with Alan Greenspan right now."
Even Greenspan, chairman of the Federal Reserve, reportedly is losing out.
Greenspan keeps almost all his own money in money market funds and Treasury bills to avoid what could be seen as a conflict of interest. So lower rates did a number on his conservative portfolio, too.
Based on a disclosure in July, Greenspan generated between $55,000 and $139,000 in income on his holdings last year. He does not report exact figures for his assets and income, just ranges.
That's less than half the reported interest income for 2001 and down about two-thirds from his reported 2000 earnings from Treasury bills and savings.
Skimpy savings rates are hitting nearly everybody with CDs and savings accounts. And the hit is sizable for retirees with a lifetime of savings.
Consider this: just three years ago, it wasn't hard to get a 6-percent annual return if you locked up money in a five-year CD. It was a good time for CD rates. So on $100,000 in savings, one could be making $6,000 in interest each year with a higher-rate CD issued a few years ago.
Now, savers can see less than half that rate.
If you put $100,000 into an average five-year CD bought in early July, the annual income from interest would drop to about $2,450 a year. The average annual yield on a five-year CD was 2.45 percent by early July, according to Bankrate.com, which tracks interest rates and banking trends.
The most pitiful payback has been for those who aimed for easy access to their money. Money sitting in a money market account is paying next to nothing now.
A money market saver was getting 0.52 percent on average by Aug. 13, according to Bankrate.com. That compares with an average yield of 2.12 percent on a money market account at banks three years ago.
On $100,000 in savings, a retiree might see about $520 a year in income from a money market account. That's down from about $2,120 just three years ago.
And some retirees are getting squeezed on other fronts to boot: prescription drug prices soared and stock portfolios got pounded.
"We're down substantially from three years ago," said Paul Kaniut, of Rochester Hills, Mich.
So Paul and Diane Kaniut crossed off cruises this year and they drove instead of flying to Florida, the Carolinas and Canada.
Diane Kaniut says the couple would like to take another trip to Europe but won't do it because their savings have been hurt by the stock market decline and low rates.
"We are definitely not doing the things we'd like to do," said Diane Kaniut, who worked as a development officer and is now retired from the Academy of the Sacred Heart, a private school in Bloomfield Hills, Mich.
The couple, who have six children in their 30s and 40s, do not receive a monthly pension check. They live on Social Security checks and retirement savings.
"I'm not pessimistic, but let's just say I'm nervous," Diane Kaniut says. She jokes about her children. "We keep telling them to be successful so we can borrow money from them."
But Paul Kaniut says he's not worried. He did not sell stocks in a panic. He and his wife still go to restaurants about twice a week.
"I'm quite optimistic that this will all sort itself out. That's why I'm standing pat on our investments," said Paul Kaniut, 74, who is self-employed and does some part-time work designing and building boats.
Scrimping and cutting back on frills, though, are clearly what many savers feel forced to do.
Many retirees aren't taking the longer road trips they used to take, said Marye Miller, director of the Older Persons Commission covering Rochester and Rochester Hills.
Short day trips are still popular. But she said it's getting harder to get people to sign up for weeklong trips that can cost $1,200 per person. She blames lower interest rates and stock market losses for eating into retirement savings.
In the Detroit area, retirees who had large investments in auto stocks also suffered when the stock market dropped.
Rudick has seen her Ford stock and Ford dividends fall in recent years.
Fortunately, she doesn't worry much about health care. Rudick's husband, William, died about 20 years ago. And she has health care and retirement benefits. He was a Ford retiree. She retired from Continental Can in Melvindale, Mich., after working there 26 1/2 years.
Rudick, who raised a family of five children, realizes it might take a few years for interest rates and some dividend payouts to get back to higher levels.
She could be right.
Financial planners and economists say that, if savers can, they need to ride it out and wait some time for higher rates. Low rates, they tell us, won't last forever. And this summer, stock prices have been picking up.
We've already seen some uptick in rates.
Since early June, yields on 10-year Treasury bonds have risen significantly. They moved from 3.07 percent in mid-June to 4.41 percent by Aug. 6.
So far, that's meant a nudge up for five-year CD rates and a nasty hit for bond fund investors. The average yield on a five-year CD moved to 2.76 percent, based on the Aug. 13 survey by Bankrate.com. That's up from 2.45 percent in early July.
By contrast, investors in bond funds saw painful losses.
Long-term government bond funds lost an average 12.71 percent between June 13 and Aug. 13. Intermediate term bond funds lost an average of 4.45 percent, according to Morningstar Inc., a Chicago-based financial services and tracking company.
Experts say the trend in rates is likely to continue to be higher.
"Just because we've had this big spike in rates doesn't mean the rate trend is over," said Steve Norwitz, a spokesman for T. Rowe Price, a mutual fund company based in Baltimore.
So savers and bond investors must continue to be defensive in their fixed-income strategy.
"You want to have a diversified income-producing portfolio," said David Sowerby, portfolio manager for Loomis Sayles & Co. in Bloomfield Hills.
Sowerby's suggestions: include corporate bonds, real-estate investment trusts and high-yield, dividend-paying stocks in the mix.
Make sure some CDs mature at different times. If you have money to save now, one might want to invest a quarter of the money in a three-month CD now, another quarter into a six-month CD, another quarter into a nine-month CD and another quarter into a one-year CD.
And then decide how to invest, as the CDs mature and rates go up. Maybe, when the three-month CD matures, you could invest the money into a one-year CD and lock up a rate that's higher than the current rates.
"You're not reinvesting everything at this one low cycle," said Greg McBride, senior financial analyst for Bankrate.com in North Palm Beach, Fla.
"You want to preserve the flexibility for taking advantage of those higher yields" in the months ahead, he said.
Another option: put some money into high-yield money market accounts through major corporations. Look at products like GMAC DemandNotes. The minimum initial investment is $1,000. The yield was 2.75 percent for GMAC notes as of Aug. 18. You do not have to be a GM employee to save with this plan. See www.demandnotes.com. Or call 800-548-7923.
Or see a similar plan, the Ford Money Market Account. See www.fordfinancial.com. Or call 800-580-4778. Again, you do not have to be a Ford employee to open this account.
Savers can write checks to pay major bills through these accounts.
Paul Nichol, manager for retail investment products for Ford Motor Credit in Dearborn, Mich., said the Ford money market account, first opened to the public in 1996, has been drawing in more money this year from yield-conscious savers.
For accounts with more than $50,000, the annual yield would be 2.84 percent with the Ford account.
Yet be warned: the above-average yields carry some risk. Money in these accounts is not insured by the federal government, unlike a bank account.
At Ford, the money in the accounts is "backed by the full faith and credit of Ford Motor Credit Co.," Nichol said.
And these accounts are not diversified investments, such as a money market mutual fund. Instead, you are making a short-term loan to a corporation.
If the economy picks up, higher rates should not be as hard to find in the months ahead.
Five-year CDs would be among the first to post higher rates. The theory is that, if inflation heats up, savers would want more interest for locking up their money.
So a five-year CD would need to pay a rate above 2.5 percent or 3 percent at some point, market watchers say.
"Lock yourself into 2.7 percent for the next five years and you may have a tougher time keeping up with inflation," McBride said.
Yes, times are challenging. But many economists say they doubt that low rates will last for the next five years or so.
And, for a few retirees, there are some good things to be said about low rates.
Rudick isn't happy with small dividend checks and low rates paid on savings.
But she recently moved into a condominium in Canton, Mich., with her daughter Janice, 54. And Bernice Rudick hopes mortgage rates will stay low enough long enough to help her sell her family's old home in Plymouth.
