Advertisement
Making Your Money Last

Savers Feel the Pain of Low Interest Rates

The Fed's low-rate policy has cost U.S. savers $470 billion.

So much for higher interest rates. When the Federal Reserve finally began nudging up rates last December, long-suffering savers saw a glimmer of hope. But rates on bank savings accounts have remained meager, recently averaging 0.16%. The Fed’s seven-year-long policy of keeping short-term interest rates near zero has meant lean years indeed for savers. A study by the Swiss insurance firm Swiss Re estimates that the Fed’s policy (what economists call financial repression) has cost U.S. savers $470 billion—and that’s after factoring in the effect of lower rates paid by borrowers. Swiss Re calls it a tax on savers and points out that at lower interest rates, older investors need a larger savings base to maintain their spending in retirement.

Savers haven’t been the only ones hurt by low rates. Pension plans, insurance companies and others who depend on making long-term investments to meet future obligations have also been struggling. Swiss Re estimates that insurers in the U.S. and the European Union have forgone $400 billion in income. As a result, companies have had to kick in more money to keep their plans funded (money that might have been used for other purposes), and insurers have been forced to raise premiums or cut back benefits, especially on long-term-care policies and some types of life insurance.

Advertisement
Advertisement - Article continues below
Advertisement - Article continues below

Meanwhile, ultralow rates have been a boon to the U.S. Treasury, which has saved billions of dollars in interest on the government’s considerable debt. Low rates have also helped push up the stock market, spurring yield-starved investors to pile into dividend stocks. In our monthly reader poll, 83% of Kiplinger’s readers told us they own dividend-paying stocks. Around here, dividends is the magic word; we can’t write enough on the subject (see 6 Great Dividend Stocks for Retirees).

This month, we go beyond dividends to take in the full panoply of income investments. In his cover story, associate editor Daren Fonda has turned up opportunities that will pay you as much as 11%. But remember: The higher an investment’s yield, the lower its quality. “Don’t reach too far beyond what you need to meet your goals,” says Daren. “It’s easy to get burned.”

On the safer end of the scale, you can earn up to 4% or more on some bank accounts. But you’ll have to jump through a few hoops, such as making a required number of debit and credit card transactions each month.

Advertisement - Article continues below

Municipal bonds can be compelling if you’re in a higher tax bracket; after taxes, yields on munis exceed those of Treasury bonds with similar maturities. Also attractive are real estate investment trusts. “You can get 4% or 5% without stretching too far into junk territory,” says Daren.

Safety first. Another principle of income investing: Bond prices and interest rates move in opposite directions. So when interest rates rise, bond prices fall. You can protect yourself by buying individual bonds and holding them to maturity, when you’ll get back the face value (assuming the issuer doesn’t go belly-up).

If you choose to buy bond mutual funds, either for convenience or for the expertise of the managers (in the case of risky junk bonds, for example), prices will fluctuate. But that’s of less concern if your goal is mainly to collect income. And if you’re willing to hold the fund for the full interest-rate cycle, the price will recover, says Daren. (Find in-depth coverage of the fixed-income market in our monthly newsletter, Kiplinger’s Investing for Income; $199 for one year.)

Bottom line: Stick with relatively safe investments in your core portfolio, and consider some of the more exotic alternatives to add a little oomph.

Advertisement

Most Popular

12 Tax Deadlines for July 15 (It's Not Just the Due Date for Your Tax Return)
tax deadline

12 Tax Deadlines for July 15 (It's Not Just the Due Date for Your Tax Return)

Between due dates for IRA or HSA contributions, paying estimated taxes and other deadlines, there's more to do by July 15 than just filing your federa…
July 10, 2020
65 Best Dividend Stocks You Can Count On
stocks

65 Best Dividend Stocks You Can Count On

These 65 Dividend Aristocrats are an elite group of dividend stocks that have reliably increased their annual payouts every year for at least a quarte…
July 8, 2020
Know Why Your Credit Score Changes: 9 Money Moves to Consider
credit & debt

Know Why Your Credit Score Changes: 9 Money Moves to Consider

Your credit score is a key indicator of your financial well-being and of the risk you pose to lenders. How good is yours?
July 10, 2020

Recommended

13 Dividend Stocks That Have Paid Investors for 100+ Years
stocks

13 Dividend Stocks That Have Paid Investors for 100+ Years

Here are 13 dividend stocks that each boast a rich history of uninterrupted payouts to shareholders that stretch back at least a century.
May 21, 2020
20 Dividend Stocks to Fund 20 Years of Retirement
stocks

20 Dividend Stocks to Fund 20 Years of Retirement

These 20 high-quality dividend stocks yield roughly 4% or higher and should grow their payouts even more -- a powerful 1-2 combo for retirement income…
March 9, 2020
Closing Bell 7/10/20: Gilead Gives Stocks a Booster Shot
Markets

Closing Bell 7/10/20: Gilead Gives Stocks a Booster Shot

Stocks rallied out of negative territory Friday after Gilead announced that remdesivir helped reduce COVID-19 mortality risk in a clinical trial.
July 10, 2020
Kiplinger's Weekly Earnings Calendar
stocks

Kiplinger's Weekly Earnings Calendar

Check out our earnings calendar for the upcoming week, as well as our previews of the more noteworthy reports.
July 10, 2020