The Wall Street Journal recently ran a piece echoing what I’ve been saying for years “Fed’s Low Interest Rates Crack Retirees’ Nest Eggs”. The article talks about how the Federal Reserve’s low interest rate policy is helping to bail out the banks at the expense of our nation’s savers, specifically our retirees.
Just a few short years ago it was reasonable for a retiree to earn a rate of interest around 6% without taking on a significant amount of risk. In fact, prior to the financial crisis you could earn a virtually risk free rate of return with full liquidity that was near 6%.
For a retiree with $1 million they could expect an income of $60,000 annually with little potential for losing capital. Today its tough for a retiree to earn 2% without taking on risk, which equates to only $20,000 in income. This is a 67% drop in interest income. For retiree’s this creates a financial death spiral as they are forced to dip into principal. The more they dip into principal, the less interest they earn, which forces them to dip further into principal – it vicious.
These low interest rates support banks by lowering their borrowing costs and allowing them to earn a spread. It is robin hood in reverse, stealing from our nation’s savers in order to prop up huge financial institutions who have become too big too fail. Stealing from the poor and giving to the rich.
The Journal says:
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.”
The pain inflicted on savers could have political repercussions. Retirees are among the country’s most active voters, with the power to influence a wide range of issues, such as who will bear the burden of fixing the federal government’s finances and whether politicians should rein in the Fed.
This Robin Hood policy is undermining our retirees and savers and leading them to speculate in order to earn higher returns, this will end poorly.
Scott Dauenhauer, CFP, MSFP, AIF