My Retirement on Twenty Basis Points

I am an early baby boomer, fast approaching 65 years old and now semiretired, albeit involuntarily.  My children have earned two undergraduate and one graduate degree without either of us incurring any debt.  I’ve lived in the same house for 35 years, paid off my mortgage, maintained a modest life style and saved. My hope was that I’d be able to live a comfortable retirement with Social Security and a small pension, generously supplemented by interest on my savings. I suspect I have contemporaries who had similar plans. 

Last week, I received a notice to renew a certificate of deposit at a local savings bank. The rate which I was offered for one year was 20 basis points.  In other words even without considering taxes, I was offered 20 cents per annum per each $100 in the CD. At the same time, numerous indices derived from the greatest casino in the world, the New York Stock Exchange, are trading at or near all-time highs and the long depressed residential real estate market is getting frothy in some places.

My grandparents were immigrants; my parents came of age in the Great Depression. Stocks were far too risky an investment for people of their means. Despite all my education, I have had no success in my few forays as an equity investor. Only via the “magic of compounding”, getting 4-6% interest annually in a bank account where my principal was guaranteed have I managed to amass a nest egg. I suspect this history resonates with more than a few others.

The country has just come through its worst economic time since the aforementioned Great Depression.  Many “experts” agree that the long-running easy money stance of the Federal Reserve which allowed gigantic real estate and to a lesser extent stock market bubbles to form played a significant role in fomenting the downturn. So what has been the Fed’s response; even easier monetary policy driving interest rates on safe investments lower and lower!  And what has been a result of this policy? An integral portion of the financial stability for the nation’s growing cadre of retirees and near retirees has been demolished. Meanwhile does the Fed hope that by pushing normally risk-averse savers into stocks at precisely the wrong time in their lives and by supporting an artificially high value of residential real estate, a so-called “wealth effect” will ensue and raise aggregate demand?  All bubbles burst and this time will be no different with the end result being that America’s seniors who are foolish enough or desperate enough to try chasing this tiger will wind up being eaten by it and will eventually require government support to survive.

The New York Times reported that a recent survey indicates that more than half of households headed by residents between the ages of 55 and 64 have less than $125,000 in retirement savings.  Of those, more than half had none.  Yet for those that do a few thousand dollars of interest income annually can make a real difference. A policy by the Fed which encourages banks to offer a “real” interest rate in a safe investment might actually work wonders both in the long and short run.  Certainly the easy money policies of the last decade have not proven to be successful.