Jeff Sherman, 61, who owns a dog-sitting service with his wife in Sherman… (Mel Melcon, Los Angeles…)
Laraine Watts called her financial advisor for help with an urgent issue — what to do when her bank certificate of deposit comes due at the end of this month.
In the past, the Anaheim retiree would have rolled the money into a new CD. But with interest rates at record lows, Watts is scrambling to find better returns.
"If you put $10,000 in the bank you're lucky if you get 50 cents anymore," Watts said. "Why put it in the bank? You might as well put it under the mattress."
The Federal Reserve has dropped interest rates to historically low levels in hopes of resuscitating the ailing economy. That's been a boon for borrowers taking out auto or home loans, and a salve for banks still trying to recover from the global financial crisis three years ago.
But for savers, the microscopic yields are the equivalent of a migraine. They're especially hard on the elderly, many of whom rely on steady interest income to pay routine living expenses.
And the lack of interest income will ultimately take its toll on the sputtering economy: Americans will hold back spending because they aren't making as much money off their low-rate accounts. Consumer spending accounts for about 70% of the U.S. economy.
"It has decimated the interest income that savers and retirees are receiving," said Greg McBride, an analyst at Bankrate.com, a personal finance website. "Retirees are not in a position to take on more investment risk, so they're really hamstrung by these record-low interest rates."
Yields have fallen steadily for three years, and the Federal Reserve announced last month that rates are likely to remain low until 2013 while it tries to nurse the economy back to health.
The average one-year CD yields just 0.4% — a paltry $400 on a $100,000 account, according to Bankrate.com. That's down from 2.4% three years ago and 3.75% in 2007.
Yields on other short-term investments also are at rock-bottom levels. The annualized yield on money market mutual funds is 0.04% — one-tenth the level of one-year bank CDs.
And Treasury bonds aren't much better. The yield on a 10-year Treasury note — which sank to less than 2% late last month, a modern-era low — is a measly 2.05%.
That has left people such as Watts scratching their heads.
The 67-year-old lives on a fixed income composed of interest from bank deposits and annuities, Social Security and a small pension from the local school district at which she used to work. Watts has cut her spending in recent years as rates have fallen.
She still shells out for necessities such as upkeep on her home, but has eliminated discretionary purchases. Watts had at one point considering buying a new car last year, having bought only one new car in her life, but ultimately decided on a used one.
"Every place that I could cut I have cut," she said.
At the suggestion of her financial advisor, Watts is considering buying government bonds with the money from her maturing CD.
Like Watts, Marilyn Hills, a retired senior-citizen counselor for the city of San Jose, has given up on CDs. Like the retirees she used to care for in her job, Hills assumed that she would rely on bank interest in her old age.
But she cashed out the last of her CDs two years ago and distributed the money to her children.
"I was doing pretty well in CDs while the interest was higher," Hills said. "There's no impetus to do that anymore. The interest rate is so low it's ridiculous. It's not worth piddling around with."
The search for alternatives to low yields are coaxing some people into different types of investments. David Winn liquidated two money market funds to plow the cash into his gold coin business — and some of his customers have taken similar steps.
One customer, for example, told Winn this summer that he was taking money out of the bank to buy gold.
"He said with CDs being so low he wasn't going to lock his money up at 2%," Winn said. "It just didn't make sense to him."
But most people are simply grinning and bearing the lower rates. They don't like them but don't think there's much they can do about them.
Jeff Sherman, 61, who owns a dog-sitting service with his wife in Sherman Oaks, likens his money market fund to stuffing his savings "under your pillow for the last couple years."
But he sees few safe alternatives that would yield much more. "I'm just putting it up with it," Sherman said.