Interest rate cuts squeeze retirees on fixed incomes

By Eileen Alt Powell
Associated Press

NEW YORK — With each drop in interest rates this year, retirees like Lillian Bukiet have felt themselves squeezed.

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"You just don't do everything you want, or buy everything you'd like," she said.

The 11 interest rate cuts by the Federal Reserve this year to stimulate the flagging economy have been good news to borrowers, making it possible for millions of Americans to refinance their mortgages and borrow on easier terms. At the same time, the returns on federally insured bank accounts, Treasury bills and money market mutual funds — the staples of many retirees' portfolios — have dropped, in some cases to 40-year lows.

The return on a one-year bank certificate of deposit currently averages 2.21 percent nationwide, down from 5.53 percent a year ago, according to Bankrate.com, a consumer finance Web site.

"That works out to a difference in interest earnings of more than $3,300 for a $100,000 portfolio," said Bankrate.com financial analyst Greg McBride. "That's a big bite for someone who is dependent on Social Security, a pension and earnings from CDs or other fixed-income accounts."

That's an especially bitter pill for retirees like Bukiet, who is of the generation raised during the Great Depression of the 1930s.

"The Depression taught us to live at a pace you can keep up, and I've done that," Bukiet said. "But to see how seniors, who have worked so hard and saved, now have to struggle, it just doesn't seem fair."

There are steps people can take to try to increase their income, but many pensioners are hesitant to take them, financial planners say.

"Many would never even consider stocks," said retirement expert Ed Slott of Rockville Centre, N.Y. "They would still take the view, 'At least I don't lose any principal in the bank.' And that would be reinforced right now because they're scared about the economy."

Gary Schatsky, a financial adviser in New York City, says the decline in rates hasn't been as devastating as in the past because inflation is low, holding costs down.

"People on fixed income should be as concerned with inflation as with their rate of return," he said.

He added: "In addition, it's good news if it prompts people to focus more on their investment decisions."

Schatsky said that even older people should make sure they have a diverse asset mix.

"Maybe they need to move from bank CDs to money market mutual funds, or from funds to short-term, top-quality bond funds or to high-yield, insured CDs," he said.

Schatsky said that at the very least, people with fixed-income investments should be looking to lengthen maturities. The current rate on five-year CDs is about 4.5 percent, more than double the rate on certificates maturing in three months.

Even these modest steps, however, can be hard for those retirees who remember the stock market crash of 1929 and the Depression, said Sharon Luker, a certified financial planner in Plano, Texas.

Luker, too, suggests "moving a bit up the risk scale" by looking at things like collateralized mortgage obligations, or CMOs, issued by Fannie Mae and Freddie Mac; callable CDs, and real estate investment trusts.

"A lot of the older, conservative people don't want to take more risk, so they cut expenses," she said. "I hear all the time things like, 'Maybe I don't need cable TV anymore, or maybe I'll make fewer trips to the store to save gas.' Or they lower the thermostat and take fewer vacations."

Luker said some are taking part-time jobs to make ends meet.

"That's not necessarily bad," she said of retirees she advises who have found work as school crossing guards, greeters at Wal-Mart stores and ushers in stadiums.

"They have fun, they feel needed — and they bring in more income," Luker said.