Tired of paltry returns on bank savings? Here's help.
Interest rates on bank savings are so low that many retirees are looking for higher returns. If you're one of them, consider bonds and dividend-paying stocks.
Three years ago, Alfred Talley dumped his certificates of deposit and closed a savings account. The returns were "ridiculously low," recalls the New York retiree, so he went in search of higher yields.Skip to next paragraph
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It's a search that many retirees and other savers have joined as yields on certificates of deposit (CDs), money market accounts, and savings accounts have dropped to record lows, and the Federal Reserve says it plans to keep short-term interest rates exceptionally low at least until late 2014. Unfortunately, alternative investments carry higher risks. Many conservative investors thus will have to perform a difficult balancing act, keeping their portfolios as risk-free as possible while boosting returns.
"This has been a brutal environment for retirees," says Greg McBride, an analyst at Bankrate.com, based in North Palm Beach, Fla. "In addition to enduring more than four years of steady declines in rates, they still have another three years before having any hope of yields improving."
The average yield for a one-year CD stood at a paltry 0.34 percent at the end of February, while money market deposit accounts averaged 0.13 percent, according to Bankrate.com. To put that in perspective, a retiree with $100,000 in a money market account would earn $130.10 after one year with monthly compounding.
Low interest is 'impoverishing' seniors
Despite these next-to-nothing returns, there are signs that the ranks of conservative investors are growing, at least among those in retirement or close to it. Some 70 percent of retirees last year were managing their household investable assets "extremely" or "somewhat" conservatively – up from 53 percent in 2008, according to a survey by the Society of Actuaries, insurance-research group LIMRA, and the International Foundation for Retirement Education. Another survey last year by MetLife Mature Market Institute found that 48 percent of pre-retirees (age 56 to 65) were also investing more conservatively because of market uncertainty.
So what can retirees do? One big mistake would be to reach for better returns by taking on sizable risk.
"Retirees are not in a position to take undue risk to pursue higher income," says Bankrate.com's Mr. McBride. "They can do some of that in the name of diversification. But even that must be done in a measured fashion because they cannot risk creating a big dent in their principal."