How low can they go?
For Laura Horigan, a 77-year-old widow from Kapahulu, bank interest rates already are scraping the bottom.
"At one time I had almost $5,000 in a savings account, and it was getting about 40 cents a quarter," she said. "It’s crazy."
Counting decimal points is what it’s come down to for some retirees in today’s economic environment. Savings accounts, money market funds and short-term certificates of deposit are typically offering interest rates of less than one-half of 1 percent.
While record-low interest rates have made loans more affordable to borrowers for such things as housing, the income and buying power of retirees and others living on a fixed income has been drastically reduced.
"They’re at historic lows and are tending to slowly creep lower," said Greg McBride, senior financial analyst for Bankrate.com, a Florida-based financial information website. "The issue at this point isn’t whether, or how much further, they decline, but how long it will be before they post any substantive rebound. And needless to say, it is going to be several more years before yields approach levels that savers deem to be attractive."
That’s certainly not good news for seniors and others who prefer to hold their savings in the safest investments, such as bank savings and money market funds.
Savings account rates range from 0.02 percent to 0.45 percent at the 10 Hawaii banks and one depository financial services loan company that are either based here or have local branches. Money market accounts at the same financial institutions range from 0.02 percent to 0.50 percent.
The rates are even lower for certificates of deposit, or CDs as they are commonly called. Six-month CD rates at those same Hawaii institutions range from 0.05 percent to 0.25 percent. One-year CDs range from 0.10 percent to 0.40 percent.
In other words, for every $1,000 that someone deposits at a local branch, the consumer would earn just 20 cents a year for a 0.02 percent interest rate. A 0.50 percent rate would generate $5 in interest a year on a $1,000 deposit.
Hawaii credit unions, in some cases, offer slightly higher rates.
Low interest rates, coupled with the drop in home values after 2008 and the sluggish economy, are forcing many retirees and near retirees to alter their plans.
"We’re finding a lot of people, even those not yet retired, are deferring retirement because of the most recent economic situation," said Bruce Bottorff, director of communications for AARP Hawaii. "They’re reassessing themselves and decide they’re going to have to work a few more years, maybe retire from a full-time position and work part time, or consider self-employment. Many are interested in becoming entrepreneurs."
Horigan, whose husband died from "a bad heart" 25 years ago at age 55, said she’s worked about 12 different jobs during her lifetime, including her current part-time position at Ward Research, where she conducts phone surveys and recruits for focus groups. She hopes to keep her job at least two more years to help with her bills.
Fortunately, Horigan has a financial adviser who helps her make investments with the $2,700 a month she receives from a variety of sources: her late husband’s survivors annuity, small pensions from her previous jobs, and Social Security. It also helps that the rent for her studio apartment is just $486 a month, including a parking stall.
Still, she’s concerned about the economy as well as her family’s future.
"I’m worried about all this sequester business," she said. "My daughter’s been in the Army for 23 years, but I’m afraid her husband may be furloughed. He works for the Department of the Army Police (a civilian federal job), and there’s been talk about cutting back on them."
The Federal Reserve is keeping interest rates low to stimulate the economy, but those stimulus measures are creating tremendous challenges for people on fixed incomes, said Barry Hyman, vice president, private client group, for the Maui branch of FIM Group Ltd.
They can put their money in savings accounts where the principal is safe from market gyrations but where inflation could eat it away. Or they can put their money into stocks and bonds, where a market crash could wipe out a large portion of their savings.
Even though consumer price inflation has remained benign at a 1.6 percent annual rate overall, certain items have gone up substantially. Since September 2009 food prices have risen at a rate of 4.83 percent per year, and gasoline prices have risen at a rate of 23.9 percent per year, according to Bloomberg data.
"Investors on fixed incomes are facing a real dilemma," Hyman said. "Traditional fixed-income investments are at yields near zero, providing them little income, while the value of their principal is losing ground, and in the case of many things people consume, at a steep rate. In order to merely retain the purchasing power of people’s principal, they can no longer rely on income investments that provide inflation protection and a guarantee return of principal."
So what’s a person to do who’s on a fixed income?
Hyman said people sometimes feel forced into investing in stocks, real estate and other growth or risk assets to get a better return. But he said pushing up the value in those areas often can create a price bubble that ultimately could burst.
"Investors are well advised to build a portfolio that meets their specific needs for income, future expenses, life goals and tolerance for periodic downward price movements," Hyman said.
McBride suggests building a well-diversified portfolio that can produce income from investments other than just bonds and cash.
"Dividend-paying common stocks, preferred stock, real estate investments, trusts and annuities can all supplement, and help offset, the record-low interest earnings on bonds and cash," he said.
