Sharon McCurry worked hard for years in the health care industry, socking away as much money as she could in her employer’s 401(k) plan to retire two years ago at age 62. Now living off interest income, McCurry can’t bring herself to open her retirement account statements.
“It’s too scary,” said McCurry, who cares for her elderly mother in Kingsport. “I’m still living off the interest. As long as I can do that, and not dig into my IRA, I’ll be all right. But it’s just scary.”
The Federal Reserve recently announced plans to hold interest rates near zero for at least another two years to help jumpstart the economy. Low interest rates help borrowers get cheap loans and reduce debt faster. But they also penalize seniors and others who rely on investment income, forcing many Americans to rethink retirement.
McCurry, who turns 64 in November, was among several seniors playing a card game at the Kingsport Senior Center last week. Sitting next to her was Eddie Palmer, a Kingsport native who lives in Florida during the winter months but returns to Kingsport during the warm season.
Palmer said he worked for years for the federal government and retired in 1997 with a pension and investments. Now 72, he continues to live well, but he’s seen his return on investments shrink due to low interest rates. And that’s making him a little more conservative with his money.
“We were driving a Mercedes but we put it in the garage and got one that’s more fuel efficient,” Palmer said.
According to the U.S. Bureau of Economic Analysis, personal interest income in the U.S. totaled $986 billion last year — down about 25 percent from 2007.
The lower returns could cause more seniors to get more conservative with their spending, which could eventually impact retail stores and restaurants, as well as manufacturers and their workers.
“The people with the money who put it in the bank to draw interest — they’re the ones that’s losing. Sooner or later it comes back to haunt you,” Palmer said. “It rolls downhill.”
Jeff Bingham, president of the Kingsport financial planning firm Bingham & Hensley, said many of his senior clients are concerned about their investments.
“For savers and investors, it’s a pretty tough and confusing time. If you’re a borrower and you qualify, it’s a great time,” Bingham said.
He said his firm is looking at different options to help increase the yield on client investments. Many seniors are accustomed to keeping their money safe in a savings account, certificates of deposit, and money market accounts. Just a few years ago, those seniors could earn 4, 5, and even 6 percent on their investments. Not anymore. Today, you’re lucky to get 2 percent.
“You’re still going to have those funds, but just realize that money is not going to make very much money, and relatively speaking, when you count inflation and everything else, it really never has made that much,” Bingham said.
To increase return on investment, many seniors are considering putting at least a portion of their money in riskier vehicles. Bingham said his firm has considered high-dividend-paying stocks or stock mutual funds, and bond strategies.
“The tough thing is — going from the bank and what they’re used to with CDs and savings accounts, they know from one year to the next whether it’s getting 1 percent, a half percent, or 2 percent. A bond fund for instance, you don’t know from one minute to the next what it’s going to be worth. The price changes every day. It’s a different animal,” Bingham said. “But it is a way to get some more bang for the buck and improve yield a little bit, as long as we can get clients comfortable with it and make sure they understand what they’re getting into.”
Jerry Lukach understands the need to move at least some of his money from those safe investments to riskier versions, but it’s not something he enjoys.
Lukach, 64, retired from Eastman Chemical Co. five years ago, and says he’s always been conservative with his money. But now he says he’s less sure about his future.
“You feel like you have to invest in things other than the very safe bonds, and therefore, that means the future is more uncertain,” said Lukach. “You just don’t know for sure how it’s all going to come out because you don’t have that safe place to put your money.”
Lukach recently attended a seminar hosted by Integrity Capital Management (ICM) on how low interest rates impact investments.
John Atkins, a certified financial planner with ICM in Kingsport, led the seminar, telling about a dozen participants to watch out for potential scams targeting investors looking for higher returns on their money.
“A lot of times, you’ll see a guaranteed rate, but that will be good for one year over a 10-year contract. What about the other 9 years?” Atkins said. “People make desperate decisions when they’re looking for that yield. You may see a bond that might pay a higher interest rate. But be careful of the credit quality. You need to walk into these situations with your eyes wide open.”
He said that in today’s low interest rate environment, it makes sense to have your money in diversified investments. If you’re too conservative and have everything in safe vehicles with little to no return, “you could run out of money,” Atkins said.
The Employee Benefit Research Institute, a nonpartisan research group based in Washington, estimates that 44 percent of baby boomers between age 48 and 64 will run out of money in retirement to meet basic needs and uninsured health care costs.
To help make sure you don’t fall short of money, Atkins said it’s important for seniors to rebalance their portfolios from time to time, factoring in both risk and return.
“And keep your emotions in check. Unless you keep them in check, they can cause you to do some silly things,” Atkins said.
And when the market dips, don’t panic, he said.
“It consistently makes more sense to just ride it through and to position yourself in a well designed plan that will allow you to comfortably ride it through,” Atkins said.
He said his firm has considered moving more client cash to floating rate bond funds with short maturity dates. “It’s a little bit more risk, but it’s more productive than cash,” Atkins said, estimating it yields 4 to 5 percent.
Atkins said ICM also considers Treasury Inflation Protected Securities (TIPS) as a hedge against inflation. And ICM continues to study new asset classes to help boost client returns, he said.
Real estate is another option for some investors.
Palmer, the retired federal worker, said he owns apartments in Kingsport, and the rental income helps offset lower investment returns. “The rental income takes care of a lot of it,” he said.
Other folks are on the same track. Kathy Richards and her husband Michael have purchased rental houses in downtown Kingsport to help boost their income.
“When you look at return on investment, the rental income is quite a bit better than it would be from a money market or something like that,” Richards said.
Kathy Richards grew up in Kingsport and then moved to Washington, D.C., where she and her husband owned and operated a small electrical lighting and sign business for 12 years.
“We worked so hard to make that business fund our retirement. We socked money away, everything that we could — save, save, save. We were real strategic,” Kathy Richards said.
The Richards sold the business and moved back to Kingsport. They were able to put money in the bank, plus buy a house and property — all mortgage-free.
“Our plan really was to move here, and downsize our financial needs so we could downsize our working hours,” said Kathy Richards, 54. Her husband Michael is 60.
“We wanted to work part-time for about 10 years — just enough to pay for our expenses for 10 years. And if we were really conservative, we would be OK when we wanted to do all unpaid work,” said Kathy, who enjoys volunteering.
Instead of working part-time, Kathy now works full-time as a business coach for the company she started — AdviCoach.
“For me, the low interest rates are one of the reasons I have a bigger business than I thought I would and one of the reasons I’m working full time,” Kathy said.
She reminisced about the days when interest rates were high — her first mortgage carried a 14 percent interest rate, while the zero coupon bonds she got to help fund her daughter’s education carried a 12 percent rate.
Today, folks who qualify can get a mortgage with an interest rate around 3 percent.
“Our house payment was huge compared to what you’d pay now,” she said. Lukach, the Eastman retiree who’s now 64, said his daughter recently refinanced her house to take advantage of low interest rates.
“Basically my view of the (Federal Reserve) and what they’re doing with interest rates — they’re essentially taking money from me and all my cohort retirees who would have gotten 3, 4, 5 percent on our money and they’re giving that to my daughter and others like her so they can refinance and get a lower rate,” Lukach said. “That’s essentially what’s happening — it’s going from one area of the economy to the other. I’m not saying it’s right or wrong, but that’s what’s happening.”