Tuesday, December 23, 2008

Opinion: Seniors Victimized By Low Rates

With the Feds lowering short term rates to zero and attempting to lower long term rates by buying Treasury bonds homeowners with equity and good credit are doing handstands. Perhaps all of this maneuvering will help, perhaps not, only time will tell. What is left out of the story however are those who are effectively subsidizing this policy - Seniors who rely on reasonable interest rates for income.

While the meltdown in the stock market has been epic, at one point a tad over 50%. The meltdown of interest rates has been complete. Last year a senior could get a rate of 5 - 6% on their money with little, even no risk in most places. I even have a few clients who locked in a risk free rate of 7% for five years in a 457 plan they had access to. For seniors who were earning 5%, they would get about $5,000 per $100,000 invested. Today that rate is now nearly zero. You can shop around and get 2 or 3% in a CD, though you may even have to go out five years to do that. That would be around $2,000 per year of income for every $100,000 invested a drop of 60%.

What is worse is that the inflationary forces that have appeared to disappear and even reverse into deflation (which does actually make the $2,000 go farther......until you factor in that seniors are not experiencing deflation) are short term. The return of inflation is inevitable. This will further decimate the savings, though it will probably raise rates.

These low interest rates will push seniors to look for higher rates, not thinking about the higher risks. They will be marketed to by weasels who will attempt to lure them into their faux products promising higher returns with little or no risk - a combination that doesn't exist (can you say Madoff).

Be vigilant out there and stay on your guard.

Scott Dauenhauer CFP, MSFP, AIF