Interest Rates and Retirement

A recent Wall Street Journal article discusses the dilemma many retirees face because of current interest rates. The Federal Reserve has been keeping interest rates low in order to stimulate the economy. This has created benefits for banks, mortgage borrowers, and others, but it has created problems for millions of savers. Retirees are the most vulnerable because they do not have many options to restore lost income on the investments they have made over their lifetimes.

According to data from the U. S. Department of Labor, in 2009 the average investment income for the 24.6 million households headed by people age 65 years and above was $2,564. This was down 34% from 2007. According to the Employee Benefit Research Institute, one in three retirees had used more of their savings than planned to pay for basic expenses last year. The average interest rate paid on relatively safe investments, including savings accounts, certificates of deposit, and money market accounts is 0.24% as of January 2011. This is the lowest level on record since 1959. These rates do not compensate for inflation, which was running at a 5.6% annualized rate for the three months ending in February 2011.

Richard Fischer, president of the Federal Reserve Bank of Dallas says, "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. That state of affairs is not sustainable for a long period of time." The results of the pain inflicted on savers could have political repercussions because retirees are among the country's most active voters.
Low interest rates also penalize people of any age who are trying to build up funds for their future. These rates also discourage people from saving for emergencies such as job losses and other financial issues. According to the Federal Reserve, Americans' net contributions to their bank and retirement accounts amounted to 4% of disposable income in 2010, the lowest level since the Federal Reserve started maintaining records in 1964, with the exception of 2009 when people pulled money out of savings and retirement accounts.

Some retirees are maintaining more of their assets in equities, hoping to benefit from increases in the stock market and to avoid running out of money. This goes against the traditional advice of some financial planners, who recommend that retirees keep more of their assets in relatively safe, fixed income investments. Neil Kasanofsky, a financial adviser in Port Charlotte, Florida, says, "The fear is palpable at this point in their lives. Given the low level of interest rates, you're hard-pressed to tell someone to get into bonds or ten-year CDs." Some people are in even more trouble because they took out mortgages or ran up credit card debt, and now they do not have the interest income from their investments to help pay off these debts. In the meantime, many seniors have cut back on expenses as much as they can so that they do not outlive their money. Time will tell how each of these strategies will play out.

The attorneys at Oast & Hook can assist clients with their estate, financial, insurance, long-term care, veterans' benefits and special needs planning issues. Sandra L. Smith joined Oast & Hook in 2003.  Oast and Hook has served Southeastern Virginia and North Carolina for more than 80 years. Visit their website at www.oasthook.com for more information. Ms. Smith practices primarily in the areas of elder law, estate planning, estate and trust administration, special needs planning, asset protection planning, long-term care planning and Veterans' benefits. She is certified as an Elder Law Attorney (CELA) by The National Elder Law Foundation (NELF). In 2008, Ms. Smith was named as a Rising Star by Virginia Super Lawyers magazine. Rising Stars names the state's top up-and-coming attorneys.

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