Low interest rates bad for savers

David Gura Aug 12, 2011

Low interest rates bad for savers

David Gura Aug 12, 2011

Tess Vigeland: Heidi mentioned that mortgage interest rates are touching all-time lows. It is a great time to be a borrower, provided you can pay it all back, of course.

But woe is you if you are a saver. And this week the Federal Reserve didn’t do you any favors. The Fed’s Open Market Committee came out and basically said that its benchmark interest rate is likely to stay low for a long time coming. Meaning your savings accounts, your CDs… They’re just hanging out sipping lemonade on the veranda.

Marketplace’s David Gura has more.

David Gura: If you listened to Marketplace this week, you’ve already met Jane Dougall. She’s 65, and a librarian from Rhinebeck, N.Y.

Jane Dougall laughing

Jane Dougall: At one point in my life, retirement had this lovely glow to it. That it was you could sit on a beach, you know, and have a glass of wine and relax, and your days would be long and leisurely. And now it’s, “I wonder if I can retire by the time I’m 70 or 75.”

There are a lot of Americans like Jane, who may have to delay retirement. And there are many more who are already retired, and are being squeezed by the low interest rates we’ve experienced over the last three years.

Justin Wolfers is an economist at the Wharton School. He says, when interest rates go down, it’s a double-edged sword.

Justin Wolfers: Those of us who are borrowing, buying houses, or more importantly, firms that are making investments and opening new factories, this is good news for them.

That’s why the Fed cut interest rates, to spur economic growth. But, Wolfers says, here’s the other edge of the blade.

Wolfers: It definitely hurts those of us who are saving and trying to live off that income.

If your money is in something that, traditionally, has been safe, like a Money Market fund or a CD, your nest egg isn’t going to grow very much. For retirees right now, interest rates don’t keep up with inflation.

Leith Harmon is a financial planner in New York City. She says it’s almost impossible for Americans to live off a fixed-income account.

Leith Harmon: Savvy retirees are going to be in a position to recognize that they’re going to need to seek other vehicles to increase or maintain the true value of their nest egg.

You might call John Becker a savvy retiree. After serving in Vietnam, he got an MBA. Then he had a long career in the metals industry. And now, Becker’s retired, living in Zebulon, N.C., where he keeps a close eye on his 401(k).

John Becker: I watch it like an eagle, in case I get to a point where I decide I want to sell, or I’m happy enough where it is. I know what debts I have, I know what I need to do.

But many investors, who are retired, or saving for retirement, aren’t like Becker. They’re not as aggressive. John Graham is a finance professor at Duke University. He says, amidst all this economic uncertainty, with interest rates so low, savers may feel desperate.

John Graham: It’s really hard for someone who is seeking a reliable three, four, five percent return to know where to put their money these days.

And Graham says, if they don’t know what they’re doing, they may take riskier bets — on corporate bonds that could default, or stocks that could tank.

In Washington, I’m David Gura for Marketplace Money.

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