Retirees don’t have the long term to deal with low interest rates

The Federal Reserve Chairman has vowed to keep interest rates at near zero for as long as it takes to help the economy. That may be quite awhile.

In the meantime savers and retirees who used to count on interest payments to supplement income have nowhere to go. The reality is that even with low inflation they are getting a less than zero return on cash investments.

While core inflation is low, some things retirees must spend money on like food and gasoline are increasing in cost. Couple all this with a very low likely COLA for Social Security in 2013 driven by a low growth in the CPI-W and many retirees are facing a double whammy. And guess what, these folks are a big part of the economy too, some of the very people the Fed is counting on to jump start the economy by spending.

Even retirees fortunate to have a 401(k) are hurting. Once in retirement the asset allocation shifts to be more conservative with less in equity to lower risk and more in investments such as stable value funds or GICs which are interest driven. These investments naturally see a decline in their returns as well. For those who can put their assets at a bit more risk, solid dividend paying companies may be an alternative, but that applies to a small segment of retirees.

So Mr Bernanke, while you see a long term benefit in low interest rates now, many retirees counting on interest income don’t exactly have the luxury of a long term perspective and those folks represent one-sixth of our population.