Fed Hurts Retirees

How the Fed Hurts Retirees

By Annalyn Censky | CNNMoney.com 

The Federal Reserve has kept interest rates near zero since 2008, but the economic boost comes at the expense of these savers.

Canceling vacation plans

Henry Baker III, 75

Jacksonville, Fla.

Henry Baker IIIJust a few years ago, I was earning 4.7% interest on my $80,000 in savings. The income paid for a week-long vacation for me and my wife, plus more.

In 2011, that rate dropped down to 0.15%. It's ridiculous!

I took everything out of CDs at the beginning of this year when my bank closed (another unfortunate sign of the times), and I went to a bank that offered a special checking account with a 0.5% interest rate.

Within six weeks of opening that account, it dropped to 0.35%. That said, it's still better than any other investments I can find, including bonds.

About a quarter of my net worth is in that checking account. The rest of my funds are invested in mutual funds and a few individual stocks.

When a retiree today loses investment value, they have to pull from somewhere to meet their expenses. As you trim interest rates, it starts hitting us in the pocket.

I don't even know if we're going to make a trip this summer.

Cutting back on spending

Julie MoscoveJulie Moscove, 69

Fort Lauderdale, Fla.

After being burned in the stock market, my money is almost entirely in savings.

At one point, it was being built up by good interest rates, and now it's barely moving. CDs and money market funds offer next to nothing. I earn half of a percent or less.

The baby boomers are the ones who supposedly have all the money, but we're not regenerating this money because the Fed is keeping interest rates so low.

As a result, we're not creating the spending that will grow the economy. In fact, I've had to cut back on my spending. Now, I only get what I need -- no luxuries. 

Shifting back to stocks

David BothDavid Both, 65

Raleigh, N.C.

Keeping interest rates low encourages investment in other things, like stocks -- and I understand that's part of the objective.

Before the recession, my wife and I had about a quarter of our funds in a money market account that earned around 3.25% in interest each year.

Our original intent was to build up that savings, but when the economy started changing, our interest rate fell to around 0.25%.

I started shifting money to stocks. Now we keep only 8% in savings. It's not a lot of money, but it's enough that if we had an emergency, we could use it immediately. We'll also use part of it to pay for our 25th anniversary trip to Tuscany this fall.

Investing in stocks gets capital to businesses, and that could put people back to work. From my standpoint, that's a worthy goal. If you put people back to work, that helps the entire economy.

Taking on more risk

Al TurkAl Turk, 77

Brooklyn, NY

When I retired in June 2005, interest rates weren't high, but they were liveable. My plan was to take money out of my CDs every month for clothing, entertainment and medical expenses.

That used to be the typical plan for retirees: You would invest in CDs and withdraw cash from the interest they earned. Now CD's earn you less than one percent a year.

As a result, I'm going heavier into the stock market. I figure, this must have been the Federal Reserve's intent when they dropped rates to zero.

I keep track of the latest financial news and trade frequently. You have to stay ahead of the game. It's definitely against the rule of thumb, which says retirees are supposed to start thinking of safer investments.

Am I worried? Of course! The market offers no guarantees, and there are so many external factors that can affect it.

Bernanke's polices punished the savers, but it's not malicious. He had to get the stock market rolling back up. He did what he felt was good for the majority of the country, and if I was in his place, I would probably do the same thing.

If interest rates were to go back up to the 5% or 6% level, I might start saving again. 

Avoiding bonds

Darrow Kirkpatrick, 51

Chattanooga, Tenn.

Darrow Kirkpatrick I was a very conservative investor over the last decade, and thankfully, I was able to retire early at age 50.

How did I do it? I owned a lot of bonds and they did relatively well. Unfortunately, that probably won't be the case for others in the near future.

Typically you play it very safe in retirement. In more normal times, I would probably be going further into fixed income assets and even building bond ladders, but I just don't think that's appropriate in this world.

To discuss these issues and help others retire early, I started a blog, CanIRetireYet.com. Readers have written in, asking what to do for income when interest rates are at historic lows.

The Fed's policy is really pushing people into the stock market to get better returns, and that's probably the game you need to play right now as a retiree.

Otherwise, with interest rates this low, you'll lose out to inflation.