AARP The Magazine - February/March 2012

Prior to this episode, the last time the
federal funds rate dropped below 2
percent was in December 2001. It
stayed low (but not lower than 1 per-
cent) for the next three years. We’re
already more than three years into this
round of low rates, so with Federal
Reserve chairman Ben Bernanke’s
pronouncement that short-term in-
terest rates will stay low through at
least mid-2013, we’re looking at a
near-five-year stretch of the Fed’s
zero-interest-rate policy. That means
for five years running you won’t
earn anything meaningful on safe
bank deposits such as CDs, and what
you do earn won’t keep pace with
inflation (recently edging close to 4
percent). “How do you get safe in-
come today?” muses Wayne Copelin,
a financial adviser in Sugar Land,
Texas. “You can’t when short-term
interest rates are at zero.”
Consider the amount of income the
zero-rate policy has effectively vapor-
ized. Collectively, interest income
pocketed by households peaked in
the middle of 2008 at an annualized
rate of $1.42 trillion. That’s how much
savers pocketed from interest-bearing
accounts such as CDs or from bond
or dividend income. In October 2011
(the latest available data) our col-
lective haul from personal-interest
income was down to an annualized
rate of $985.6 billion. An unassailable
tenet of sound money management is
that the older you are, the more you
should rely on safe investments such
as bonds and cash. But seniors “have
been left in the lurch” by the Fed’s ac-
tion, says Charles Schwab, founder of
the eponymous brokerage firm, and
they “are paying a huge price for the
next generation.”
Leonard Glynn, managing director
for policy at Putnam Investments,
has stronger words: “This policy,” he
says, “is effectively a drive-by shoot-
ing of seniors.”
When the economy eventually
picks up steam, investors could get
whipsawed by rising interest rates. If
you invest in a five-year CD today so
you can earn—maybe— 2 percent, and
two years from now rates go up, you’ll
still be locked into your 2 percent. To
unload a suddenly inferior CD, you’ll
typically pay an early-withdrawal
fee that gobbles up a chunk of the
interest you’ve earned. Moreover, if
you’re in bonds or bond funds, rising
rates hurt: Bond prices fall when rates
go up, because newer bonds going on
the market will pay a higher rate; to
match it, you’d have to sell your old
bond at a discount. The price of a 10-
year bond could decline 10 percent if
interest rates rise 1 percentage point.
Consider that a 10-year Treasury
bond today has a yield of just about
2 percent. So a one-percentage-point
increase in rates might wipe out
roughly five years of income.

When a Bank
Guarantee
checking, and money market
deposit accounts—are feder-
ally insured. The very nature of
those short-term investments
is that you’re guaranteed to
get back what you put in, plus
interest. But banks can also
sell you stocks and bonds,
mutual funds, and E TFs. These
investments have no federal
guarantee—and they could
lose value when the markets
hit a rough patch. —C.F.
ith CDs and high-
yield savings ac-
counts paying out
measly income these days,
banks are happy to suggest
alternatives that earn more,
including bond funds and
dividend-paying stock funds.
But just because you’re in-
vesting at your friendly bank
doesn’t mean your invest-
ment is guaranteed. Only bank
deposits—CDs and savings,
Avoid Fees, and Seek Better Yields
If your bank is paying you zilch
these days, consider a credit union.
Because of credit unions’ nonprofit
structure, they typically offer better
interest rates on their accounts than
profit-driven big banks. Do some
research comparing credit unions
online at DepositAccounts.com,
a site that offers a searchable database
of top checking and savings deals.
“With some elbow grease you can
earn a percentage point or two on
your cash,” says Greg McBride, senior
financial analyst at Bankrate.com.
For example: At press time Alliant
Credit Union was paying 1. 10 per-
cent on checking accounts and 1. 15
percent on savings accounts, while
Connexus Credit Union was offer-
ing 1.75 percent on the first $25,000
in a checking account if you met
certain terms, such as making 10 non-
PIN (or signature-based) debit card
transactions a month.
Plus, 78 percent of credit unions
surveyed don’t charge a monthly
fee for checking, (CONTINUED ON PAGE 62)

50

fullscreen

AARP Newstand

article text for page

< previous story | next story >

add comment | read comments

Share this page with a friend
Save to “My Stuff”
Subscribe to this magazine
Search
Help