Bigger picture, the incentive system our central command has built for the worker rats in America is quite amazing... First, don't save... go spend (or the terrorists have won). If you do save, we will punish you with nearly invisible interest rates. Hence, use that money to go speculate - get in the stock market, immediately. Last but not least... if you don't pay your mortgage we have government programs to reward you - of course we cannot help until you've not paid your note for at least 6 months. If you are sacrificing to make the payment and ask for help, we can't help you - sorry. Or even better just don't pay and live for a few years rent free... and to go full circle, use the money you saved to either (a) speculate or (b) spend [see points 1 and 2] Understood? Did I mention no cost of living adjustment for those on fixed income because there is no inflation?
- .....with short-term bank CDs paying less than 1%, the World War II veteran expects his remaining $45,000 stash to yield just a few hundred dollars this year. So, he's digging deeper into his principal to supplement his $1,500 monthly income from Social Security and a small pension.
- "It hurts," says Mr. Yeager, who estimates his bank savings will be depleted in about six years at his current rate of withdrawal. "I don't even want to think about it." Mr. Yeager is among the legion of retirees who find themselves on the wrong end of the Federal Reserve's epic attempt to rescue the economy with cheap money.
- A long spell of low interest rates has created a windfall worth billions to banks, mortgage borrowers and others it was designed to benefit. But for many people who were counting on their nest eggs, those same low rates can spell trouble.
- Mr. Yeager's struggle highlights a nagging dilemma facing Fed Chairman Ben Bernanke. The longer the central bank keeps interest rates low to stimulate the economy, the more money it pulls out of the pockets of millions of savers. Among the most vulnerable are retirees, who have few options to restore lost income on investments built up over entire lifetimes.
- In 2009, according to the most recent data available from the Labor Department, average annual investment income for the 24.6 million American households headed by people 65 and older amounted to $2,564. That figure is down 34% from 2007, and is the lowest since 2003.
- A recent survey by the Employee Benefit Research Institute indicated that one in three retirees had dipped deeper than planned into their savings to pay for basic expenses in 2010.
- As of January, the average interest rate paid on relatively safe vehicles such as short-term savings accounts, time deposits and money-market funds stood at only 0.24%. That's one-tenth the level of late 2007 and the lowest on records dating back to 1959.
- Such depressed rates don't come close to compensating for inflation, which was running at an annualized rate of 5.6% in the three months ended February.
- "Americans who have done everything right, have worked hard, saved their money and stayed out of debt are the ones being punished by low interest rates," says Richard Fisher, president of the Federal Reserve Bank of Dallas and a voting member of the Fed's policy-making open market committee. "That state of affairs is not sustainable for a long period of time."
- Low rates don't just hurt retirees. They also penalize people of any age hoping to build up funds for the future, and discourage rainy-day savings that could make U.S. consumers more resilient to job losses and other financial jolts.
- Americans' net contributions to their financial assets, such as bank and 401(k) accounts, amounted to 4% of disposable income in 2010, according to the Fed. That's the lowest level since it began maintaining records in 1946—except for 2009, when people actually pulled money out.
- By contrast, the Commerce Department's broader measure of personal saving has risen, to 5.8% of disposable income in 2010 from a low point of 1.4% in 2005. That's in large part because it counts reductions in personal debt, such as mortgages and credit-card balances, as savings. For example, paying down a credit card with a 20% interest rate is a better way to save money than taking out a bank CD yielding 1%. But defaults, rather than saving, have driven much of the decrease in debt.
- .....more retirees are getting into riskier positions as they try to avoid running out of money, says Neil Kasanofksy, a financial adviser in Port Charlotte who has a largely elderly clientele. "The fear is palpable at this point in their lives," he says. "Given the low level of interest rates, you're hard-pressed to tell someone to get into bonds or 10-year CDs."
[Apr 20, 2009: How Banks will "Outearn" their Losses]