How to lose money by saving more

David Gura Aug 18, 2011

How to lose money by saving more

David Gura Aug 18, 2011

Kai Ryssdal: There is, of course, good debt and bad debt in any given economy. Buying a house or paying for college — generally good. Borrowing to buy three new flatscreens for that house — generally bad.

This is, as it happens, an exceptionally good time for good debt. The Fed says it’s going to keep short-term interest rates pretty close to zero for at least two more years.

But just as there’s good debt and bad debt, there are two sides to those low rates. From Washington, Marketplace’s David Gura has that story.

David Gura: In a nutshell, this is what the Federal Reserve said to savers last week: You’re not going to make any money on your savings until halfway through 2013, at the earliest.

Interest rates on savings accounts, on certificates of deposit, or C.D.s, are really, really low. And the Fed says they’re going to stay that way.

Dana Meyer: The low interest rates on C.D.s., it’s criminal. It is really criminal that you can put $10,000 in a C.D. and maybe get 1.5 percent, if you’re very lucky.

That’s Dana Meyer. She’s been retired for about two years now. She and her husband live in Omaha.

Meyer: We started, several years ago, socking away money in C.D.s when the interest rates were at 5 percent, and every time one of these comes due, the interest rate goes down, down, down, and it’s heartbreaking.

The rate on a 12-month CD is around an eighth of a percent. So, if you put $10,000 into a C.D., a year later, you’d be $80 richer. Back when Meyer was putting money into C.D.s, when the interest rate was 5 percent, the income on that same $10,000 would’ve been $500.

When you think of the billions of dollars people have in savings, that’s kind of extraordinary. Alicia Munnell directs the Center for Retirement Research at Boston College. She says low rates are bad for savers of all stripes, but especially for retirees.

Alicia Munnell: In terms of people who are trying to live off the income from their assets, it’s a real negative event.

Munnell says high rates in the ’80s and ’90s gave folks a false sense of security. In 1981, you could lock in a C.D. backed by the government at 15 or 16 percent.

Now, that’s the historical high, but there were folks who didn’t think rates would drop. They thought they’d continue to make a lot of money and they could finance their retirement with Social Security, plus interest from their savings.

Munnell: The idea of just having a pile, and having an income rolling in from that pile, is no longer feasible.

For many retirees, low interest rates have eroded that pile. Dana Meyer and her husband have seen that happen.

Meyer: We’ve had to dip into our C.D.s to do things like pay for a new furnace, pay for repairs to the house.

She says they never had big plans for retirement. No trips around the world, or anything like that. But they’ve had to cut back on expenses more than they expected.

Economists I talked to said savers can get desperate when interest rates drop, especially as they get closer to retirement. Jim Chessen is the chief economist at the American Bankers Association.

Jim Chessen: What I worry about is that there are some people saying, I need to take more risk, I need to invest in the market. And that may be a strategy that works, but it can be a strategy that doesn’t and has very bad consequences.

Today, we got new data from the Labor Department, the consumer price index for the month of July. And we learned inflation is on the rise. And that, coupled with low interest rates, means folks will effectively lose money on whatever they have in the bank.

So, why keep it there? Because it’s secure. It’s federally guaranteed.

In Washington, I’m David Gura for Marketplace.

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