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  • Low Rates Make Retirees Gnash Their Teeth

    June 5, 2013 by Chris Kissell, Bankrate.com

    Savers Languish on Fixed Income

    In late 2012, Federal Reserve Chairman Ben Bernanke fessed up and revealed  the worst-kept secret in finance: The low rates the Fed has maintained in an  attempt to ignite the U.S. economy are badly hurting retirees and others who  rely on fixed income.

    “My colleagues and I know that people who rely on investments that pay a  fixed interest rate, such as certificates of deposit, are receiving very low  returns, a situation that has involved significant hardship for some,” Bernanke  said in an October speech in Indianapolis.

    Such sympathy is probably small consolation to millions of Americans who  saved diligently over the years but now find themselves struggling, thanks to  rates that have remained near zero percent for more than four years.

    “Our firm has long been of the belief that artificially low interest rates  have punished savers and retirees,” says Samuel Scott, president at Sunrise  Advisors in Leawood, Kan.

    “We heard someone say that the ‘haircut’ to depositors by Cypriot banks pales  in comparison to the ‘theft’ by Bernanke and the Fed from savers.”

    How does Fed policy hurt retirees? Bankrate counts six ways.

    Fed Policy Effect No. 1: Paltry Returns on Savings

    In June 2006, the federal funds rate stood at 5.25%. At the Federal Reserve’s  meeting in September 2007, it began lowering the federal funds rate and  continued to do so until it fell to a range of between zero percent and 0.25% in  December 2008. It remains there today.

    Rates on certificates of deposit, money market accounts and savings have  plunged in tandem.

    The result has been devastating for retirees counting on safe, fixed returns,  says Michael Rubin, founder of Total Candor, a financial planning education firm  based in Portsmouth, N.H.

    “They’re earning a lot less on their savings than any other time in recent  history,” says Rubin, author of “Beyond Paycheck to Paycheck.”

    Despite such low returns, CDs and other savings vehicles still have a place  in a retiree’s portfolio. Even getting a sad-sack 1% return is better than  exposing all your savings to higher levels of risk, says Alan Moore, founder of  Serenity Financial Consulting in Milwaukee.

    “I look at cash as market insurance,” he says. “When the stock market takes a  dive, (retirees) don’t want to be in the position of having to sell stocks to  fund their lifestyle.”

    Fed Policy Effect No. 2: Low Rates on Fixed Annuities

    Many retirees buy an annuity in hopes of getting a safe stream of income. Low  rates undercut that strategy, Moore says.

    “The problem is that the monthly income a client receives from their fixed  annuity is based on interest rates at the time they purchase the annuity,” he  says. “With interest rates at all-time lows, annuity payouts are also at  all-time lows.”

    Nathan Kubik, a Certified Investment Management Analyst at Carnick &  Kubik, which has offices in Denver and Colorado Springs, Colo., agrees that now  is among the worst times to buy an annuity.

    “Locking in these historically low rates right now through fixed-rate  annuities is the height of folly,” Kubik says.

    Kubik suggests talking to a fee-only adviser who is an expert in fixed-income  investments. Such a pro can suggest alternatives to annuities.

    Meanwhile, Moore urges investors to avoid purchasing annuities until rates  climb.

    “Another option is to buy a smaller annuity today, such as 25% of what  (investors) would normally buy,” he says.

    Doing this several times from different companies over a few years allows you  to buy at various interest rates, he says. Plus, buying from separate companies  protects you if one of the companies goes bankrupt.

    Fed Policy Effect No. 3: Underfunded Pension Funds

    Today’s pension funds are in big trouble. Ninety-four percent of corporate  defined benefit pensions were underfunded in 2012, according to a recent report  by Wilshire Consulting.

    Pension funds must make sure their assets grow at a pace adequate to cover  future liabilities. The Wilshire report notes that today’s low interest rates  make this especially difficult to achieve.

    “It is putting pressure on the already-weak pension system,” Scott says.

    But Rubin notes that pension woes are unlikely to affect large numbers of  retirees.

    “Most retirees don’t have pensions and will not be affected,” he says.

    He also believes that current pension recipients are unlikely to see their  payout cut. But future retirees may not be as lucky, he says.

    Moore agrees. “It is hard to know if clients can depend on them for their  retirement income,” he says. Workers who are worried about their company’s  pension plan must take action now. “They need to save more or work longer, as  well as delay Social Security, to maximize the benefit they will receive.”

    Fed Policy Effect No. 4: Costly Long-Term Care Premiums

    Long-term care insurance covers the cost of a wide range of expensive  services you may need in your final years, including nursing home care, assisted  living facilities and adult day care. This insurance potentially can save you  and your family hundreds of thousands of dollars.

    But thanks to falling interest rates, long-term care insurance premiums have  skyrocketed, says Jesse Slome, executive director of the American Association  for Long-Term Care Insurance.

    “Lower rates have wreaked havoc on long-term care insurance costs,” Slome  says. “Rates today are about 50% higher than they were five years ago.”

    As interest rates have fallen, insurers have seen the return on their  investments slip. For every 1% decline in rates, insurers need to hike premiums  by between 10% and 15%, according to Slome.

    Consumers may be tempted to delay buying long-term care insurance while they  wait for interest rates to rise. But that strategy carries risks, Slome  says.

    “Twenty-four hours from now, your health can change,” Slome says. “Or, you go  to the doctor and some condition is diagnosed. Now, you are uninsurable.”

    Instead of delaying a purchase, Slome encourages people to talk to a  long-term care insurance specialist who can offer options for making care more  affordable.

    Fed Policy Effect No. 5: Making Safe Havens Unsafe

    Scott says many retirees are risk-averse and typically park a good percentage  of their cash in “safe havens,” such as savings accounts and CDs. But low  returns are forcing many older Americans to wade into the more turbulent waters  of the stock market.

    Other retirees are buying bonds with the belief they are safer than stocks.  But Scott says Fed policy may be creating a bubble in the bond market that will  burst once rates return to normal.

    “For 30-plus years, bonds have been safe, and this seems ingrained in the  minds of people,” he says. “But with a rise in rates, these safe assets will  lose value.”

    That’s because when rates rise, bond prices fall. Investors purchasing new  bonds with higher yields will shun existing low-yielding bonds.

    Kubik agrees that safe havens are not what they used to be. He urges  investors to consult with their financial adviser and create a plan for dealing  with rising rates.

    “The most important thing investors can do right now is ensure that they are  properly positioned for the impending rising interest rate environment,” he  says.

    Moore believes the danger lurking in today’s supposed safe havens presents a  lesson that investors should remember in all markets.

    “Safe-haven investments have never truly been safe,” he says. “Investments  that did well during one market downturn may do awful in another.”

    Fed Policy Effect No. 6: Stoking Future Inflation

    The Fed’s policy of keeping rates low is intended to make borrowing less  costly and, thus, stimulate the economy. But all that “cheap money” may come  with a high price if the money supply ignites inflation somewhere down the  road.

    A surge in prices would easily overwhelm the returns retirees get from CDs,  savings and other fixed-income investments.

    The Fed is closely watching for any hints of rising prices. Raising the  federal funds target rate is the best way to tamp down incipient inflation.

    “I suspect that the Fed’s policies will change at the first sign of  inflation,” Kubik says.

    But once inflation starts, it can be difficult to stop. In the early 1980s,  the Federal Reserve was forced to crank up rates to a high of 20% before it got  inflation under control.

    Moore says investors who fear future price increases should keep some of  their bond portfolio in Treasury inflation-protected securities, or TIPS, which  increase your principal in tandem with rising inflation.

    Read more:  http://www.foxbusiness.com/personal-finance/2013/06/03/low-rates-make-retirees-gnash-their-teeth/#ixzz2VNe7I2Gq

    Originally Posted at Fox Business on June 3, 2013 by Chris Kissell, Bankrate.com .

    Categories: Industry Articles
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