Lower interest rates hit retirees’ nest eggs

October 9, 2011 at 12:00a.m.

Sun Sentinel

FORT LAUDERDALE, Fla.

These are times that try seniors’ souls — and their nest eggs.

Federal officials’ efforts to boost the economy by lowering interest rates have led to next-to-zero returns on CDs and other federally guaranteed savings accounts popular with retirees. The downward trend can take a big bite out of seniors’ incomes.

Hallandale Beach, Fla., retiree Joan Siegel is afraid that piddling interest on the federally insured bank accounts she has won’t be enough to keep her afloat, along with her monthly Social Security check.

A recent bank statement scared her: She earned just $1.36 in interest from one of her main accounts.

“It’s getting down to the point I won’t have anything left,” said the 75-year-old former company vice president. “I don’t know what tomorrow will bring. It’s extraordinarily scary.”

Yields on certificates of deposit and savings accounts have fallen for four years. Last month, the Federal Reserve announced a plan to push interest rates even lower by selling shorter-term U.S. Treasury bonds and buying longer-term ones.

That’s on top of the Fed declaring it will keep rates low until 2013.

The average one-year CD now yields just a 0.4 percent return — a paltry $400 on a $100,000 account, according to personal finance website Bankrate.com. That’s down from 2.4 percent three years ago and 3.75 percent in 2007.

Yields on other short-term investments also are at rock-bottom levels. The annualized yield on money market mutual funds is 0.04 percent — one-tenth the level of one-year bank CDs.

Mari Adam, a Boca Raton, Fla., certified financial planner, explained that the declines are tied to federal efforts to keep interest rates on mortgages and other loans low so that borrowers will start spending again. “Corporations and even the U.S. government benefit by obtaining low-cost financing,” she said.

But other Americans have been the losers.

“It has decimated the interest income that savers and retirees are receiving,” said Greg McBride, an analyst at Bankrate.com.

About one in six families owns a CD, and the oldest Americans — those 75 and older — are the most likely to have one, according to the latest data from the Federal Reserve.

Some retirees are going back to work for extra cash, spending their hard-earned principal — or venturing into risky ventures to generate income — out of fear of outliving their life savings.

Take Joe Alessi, 90, of Hollywood, Fla. The 90-year-old World War II veteran wasn’t earning much on CDs and other accounts he had invested in for decades, so a bank manager suggested he switch to securities and bonds.

Now, he is heavily invested in a fund that buys bonds from such countries as Russia, Venezuela and the Philippines.

His broker assures him that he can make a decent return — far more than the half a percent he was earning in a CD.

Recent statements show that he is, indeed, making money. But, Alessi said, the riskier investment strategy makes him nervous. “I’d rather have it in a CD,” he said.

Tom Balcom, president of the Financial Planners Association of South Florida, said some investors have no choice but to make a change.

“If interest rates are so low, you have to take some risk,” he said, or “reduce your standard of living.”

One relatively safe option is high-quality, investment-grade bonds, said Adam. They may not earn much returns — 3 percent or 4 percent on the investment, but that beats CDs, she said.

She also suggested preferred stock, foreign bonds and even high dividend stocks.

“There are plenty of good income opportunities out there if you’re willing to think outside the box,” Adam said.

But many older investors say they fear that even with these opportunities that they will outlive their savings. About one in four people over 50 already have exhausted all their savings, according to a recent nationwide AARP Public Policy Institute survey. The bad economy has forced them to spend their nest eggs, said Victoria Funes, associate director for the AARP Florida.

“Some may have lost jobs; their 401(k)s are tanking,” she said.

In addition to taking a hit on CDs and other savings accounts, some retirees also have lost heavily in the stock market.

Comcast retiree Ed Schwartz of Weston, Fla., said he and his wife, Madaline, recently saw $10,000 evaporate just in a single week from their stock portfolio.

“Costs are going up, and our nest egg is going down,” said Schwartz, 73.

He said the couple sold some of their stock and decided to cut back on expenses and curtailed vacation plans.

Schwartz added that he and his wife worked hard all their lives and faithfully saved to be able to have a secure retirement, but that is now in doubt.

“I am sick knowing that today’s market has wiped out a huge chunk of our investment income,” he said in an email. “I can’t see how we can keep going at this rate.”

Joe Cashman, 55, of Pompano Beach, Fla., recently retired from the Department of Justice but has started going to job fairs to try to find a job. He is looking to make a little extra cash to make up for losses due to low CD rates.

“We need a little bit of money to help pay for the mortgage,” he said.