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.

Illustration by Michael Sloan/The Christian Science Monitor
As conservative investors look for a higher return, one big mistake is to take on too much risk. Advisers suggest a measured move into other investments.

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.

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

Today's low interest rates "are impoverishing seniors who saved their whole life to retire," says Mark Dotzour, chief economist of the Real Estate Center at Texas A&M University in College Station.

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."

For his part, Mr. Talley of New York says he put a sizable chunk of his CD and bank account money into annuities.

Make sure to check how long your rate will be locked in. Last year, Mr. Dotzour's mother's annuity, which had been paying a 5.5 percent interest rate for three years, was renewed at a 1.5 percent rate for the next five years. "That meant her income was off by roughly 75 percent," he says.

Among other investment options are dividend-paying stocks and bonds, some experts say. Moreover, homeowning seniors may also consider obtaining a reverse mortgage to convert some of the equity in their home into cash – or even go back to work part time or full time.

New Yorker Kera Greene shops for money market funds with the highest interest rates she can find. She's also been doing more part-time work. After retiring in 2009 from a full-time job as a career counselor for a nonprofit organization, "I quickly discovered that, although I wasn't starving, I needed a little more income," she says. Thus, since 2010, she's been beefing up her practice as a career counselor and coach. "It's not a big practice," she says, "but it gives me extra cash."

Try dividends, REITs, energy sector

Among investments, consider "quality" dividend-paying companies as an alternative to CDs and money market accounts, says Mark Blinderman, managing partner of Walnut Investment Services in Brooklyn, N.Y. "Five years ago, when interest rates were higher, I recommended that my retired clients have about 40 percent of their portfolio in CDs and money markets, another 40 percent in a broad spectrum of bonds, and the rest in a mix of stocks of quality dividend-paying companies and a little cash."

Today, he says a large share of the monies in CDs and money markets should be reallocated to those quality dividend-paying companies. Among these: such high dividend-payers as real estate investment trusts (REITs) and master limited partnerships in the energy sector, which pay out most of their income to share-holders and can yield roughly 8 to 10 percent. Some of the energy-limited partnerships he likes include Enterprise Products Partners and Boardwalk Pipeline Partners, both based in Houston, and Magellan Midstream Partners in Tulsa, Okla.

Stocks are risky, he warns. "But last year when the market was flat," he says, "my clients, who held a lot of dividend-paying stocks, got 3 to 5 percent returns on their money. So they were happy."

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