Retirees feel greatest blow as savings rates decline

USA Today

The decline in savings rates that's happening because of the Fed's interest rate cuts this year hits retirees hardest.

•	See diagrams of consumer rates before the Fed started cutting compared to what they are now.

One-quarter of Americans 65 or older get 90 percent or more of their income from Social Security, according to an AARP study. Many retirees also are conservative and stick to safe, income-producing vehicles, such as bank certificates of deposit and money market mutual funds.

Younger people are typically much less risk-averse. "They have a heck of a lot more money in the stock market — and it generally benefits from rate cuts," says David Wyss, Standard & Poor's chief economist.

But the stock market hasn't responded yet. Suddenly, even meager earnings on CDs look good to investors seeking a haven, says Robert Heady, founding publisher of Bank Rate Monitor.

Consumer spending is important to the economy, so the Federal Reserve wants to make sure that taking out a mortgage or borrowing on a credit card is affordable, experts say.

But while savings rates are on a downward spiral, loan rates are a mixed bag.

The rate cuts haven't added up to much in savings for mortgage borrowers so far this year. The average rate on 30-year fixed-rate mortgages is nearly the same as it was in January.

"The Fed's action has created a lower interest rate environment," Heady says. "But mortgages are run by the bond market."

Some experts say mortgage rates won't come down much more because the bond market already has factored in the Fed's rate cut.

Robert Van Order, chief economist at Freddie Mac, adds: "The bond market doesn't think there will be a recession, and that's kept rates up."

But home buyers shouldn't be too upset. Mortgages are at historically low rates. Almost a year ago, fixed-rate mortgages were over 8.5 percent.

Home equity loans are more directly influenced by the Fed's actions. At the start of the year, fixed-rate home equity loans averaged 10.09 percent, vs. 9.07 percent last week, according to Bankrate.com.

Most variable-rate credit cards are linked to the prime rate, so they should go down accordingly. Some issuers adjust rates on a monthly basis, while others do so quarterly.