John Folsom has a solid job in medical-device sales and has put two children through college. He has lived his life, as he sees it, “trying to play by the rules.”
He and his wife invested for retirement by socking money into safe mutual funds to build a nest egg that could support their dream of one day having a house on a lake. But at 53, Folsom looks at his retirement portfolio and sees that “the rules” aren’t working.
The market crash and housing collapse hammered his net worth. Now the Apple Valley, Minn., resident’s life savings are earning about half what he had expected, dragged down by record-low interest rates.
“All of our calculations have been thrown asunder, and every- one has to rethink the whole deal,” said Folsom, who is planning to push back his retirement five years, possibly until he’s 67.
The Federal Reserve’s near-zero interest-rate policy, aimed at stimulating the economy, has created bargains for borrowers refinancing a mortgage or buying a car. But the low rates are penalizing “savers” such as seniors and others on fixed incomes, forcing millions of middle-class Americans to reconsider how they will live when they retire, if they can retire at all.
“We’re not really seeing the positive benefit of low rates, but we’re seeing a huge negative hit,” said Tim Gillaspy, who recently retired as Minnesota’s demographer. “And that needs to be discussed as a national policy issue.”
The low-interest rates are the latest financial challenge for a wave of baby boomers on the cusp of retirement. Already, an estimated 44 percent of boomers between age 48 and 64 will run short of money in retirement for their basic needs and uninsured health care costs, according to Employee Benefit Research Institute (EBRI), a nonpartisan research group in Washington.
As traditional pensions fade away, people approaching retirement typically shift their money into safer fixed-income investments, such as bonds, to generate income to carry them through their golden years. That leaves them more vulnerable when interest rates are low.
Combined with a volatile stock market, the rock bottom rates make you feel like “there’s nowhere to go” with your savings, said Nancy Nonini, whose Apple Valley company Retirement Education PLUS counsels companies on aging issues.
Meanwhile, there’s concern that declining interest returns will diminish the purchasing power of savers, which would offset the boost from making borrowing cheaper.
“It’s going to have repercussions not for one or two years, but basically for the rest of our lives,” Gillaspy said.
Altogether, personal interest income in the U.S. totaled $986 billion last year — down about 25 percent from 2007, according to the U.S. Bureau of Economic Analysis. That’s $332 billion forgone.
Retirees feel the undertow, but so do baby boomers eyeing retirement. Folsom, for instance, had planned on returns of 5 percent to 7 percent on his investments. He had to scratch that out and work with 2 percent to 5 percent.
Will it be enough? “That’s a good question,” he said.
Fed Chairman Ben Bernanke has testified before Congress that he’s well aware of the savers’ plight. In February, he acknowledged that it was a trade off, but it was necessary to get the overall economy back to health.
Fed governor Sarah Bloom Raskin downplayed the impact of the interest-rate policy back in March, noting that interest-bearing assets are only a “modest” portion of household assets, estimating it was less than 7 percent.
A Star Tribune analysis of federal data, however, shows that 17 percent of household assets were in interest-bearing classes last year, as opposed to, say, stocks or pensions. That’s up from 15 percent before the crash, meaning households are even more exposed to interest-rate fluctuations.
As Jack Ablin, chief investment officer at Harris Private Bank in Chicago, sees it, the Fed’s policy leaves savers and retirees as “collateral damage.”
The situation has forced middle-class Americans to make some difficult choices: take greater risks with their money, work longer, temper retirement expectations and safe-keep hard-earned savings money in accounts that won’t earn much.
Many people are choosing ultra-safe vehicles such as bank accounts and certificates of deposit that pay next to nothing. People wary of the stock market and economic uncertainties have more than $8 trillion in such accounts, according to bank research firm Market Rates Insight.
Copyright 2012 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.