Drop in interest rates tough for seniors

PHOTOGRAPHER: Kelly de la Rocha

Regina Solarek of Scotia enjoys volunteering, but since the interest rates on her savings account and investments plummeted, she’s cut back on her community service work and taken on a part-time job at the YMCA.

“Whatever money I have in savings isn’t doing me any good,” said the 72-year-old, who used to depend on interest income to pay her property taxes. “I’m not making any money from it so it’s very, very difficult.”

Seniors everywhere are feeling the financial pinch caused by record low interest rates on savings and investments.

Paula Stopera, president and CEO of CAPCOM Federal Credit Union, said, “The most challenging thing in America today is that many of the people who are now retired come from the generation where, unless you worked for a utilities company, you didn’t have pension plans. There weren’t 401(k)s, so they do have to live on Social Security. So you have a check every month for $500, $1,000, $2,000, but that’s it, there is no other money unless you worked and saved some, and you could get a little bit of supplement from those other resources.”

The money senior citizens have socked away in conventional savings accounts is generating next to no interest; savings account interest rates at local banks are less than 1 percent.

Tomas Dvorak, associate professor of economics at Union College, said, “They’ve been collecting the data since 1953, and the interest rates have never been lower.”

John Fox, director of research for Fenimore Asset Management in Cobleskill, said, “As recently as four years ago, rates were OK.” In 2007 interest rates on a 90-day Treasury bill — a good proxy for savings account or CD interest rates — were 5 percent, he said. At that rate, a $100,000 investment would pay $5,000 in interest. Today, that same $100,000 investment will return just $20, he said. Rates for a 90-day T-bill have been between 0.01 percent and 0.02 percent in October.

Richard McMahan, 82, of Glenville, said he and his wife have scaled back their charitable giving because of the shrinking interest income on their savings and investments. “It increases our apprehension about what’s going to be left for us as we get older and older, and the poor kids are going to have to get by without any inheritance,” he said.

McMahan has talked with an investment adviser. “Their advice so far hasn’t been terribly encouraging,” he said.

Talk it over

During challenging financial times, experts say consulting a financial adviser or banker is the smartest thing to do.

Jeff Stone, president of KeyBank of the Capital Region, said, “We try to counsel them and talk about what they have for savings, what they have for income, how they can add to the savings and what are the options available to them, at least over the near term, until rates do come back.”

Stone said savers are shifting their money from certificates of deposit (CDs) to money market and savings accounts to keep their savings liquid. “If it’s in a CD, it’s locked in for a period of time, and I don’t think anybody wants to lock in,” he explained. CD rates, whether for a three-month or three-year certificate, are generally below 1 percent.

Although the rates for longer-term investments aren’t great right now, they’re better than conventional savings account rates, and there are good options out there for senior investors, said Stopera.

“There are alternative investments that are very safe, like some annuity programs that they can put their investments in and they don’t have to be tied up for long periods of time,” she said. “Over the past year, we’ve had some of the annuity programs paying between 3 and 4 percent, sometimes higher.” Annuity programs pay out a fixed sum at set intervals.

Dvorak advised, if an investment scheme sounds too good to be true, beware. “A danger for senior citizens in this environment might be that they are going to fall victim to a scheme that promises to be safe and deliver high returns and the senior citizen won’t understand the risks that they would be getting into,” he cautioned.

FINRA, the Financial Industry Regulatory Authority, is a good resource for investigating investment opportunities to find out if they are legitimate, he noted. “They have a very good website, and they publish investor alerts where they let anyone research these schemes,” he said.

One safe bet is to take some money out of low interest-bearing savings accounts and use it to pay off high-interest credit card debt, Stopera noted.

Although paying off debt is a smart thing to do, it’s unwise to completely drain the savings account.

Safety net

Fox cautioned, “You always have to have a safety net to provide some cash if there’s any type of emergency or any type of unexpected expense that comes up. You’re not going to earn very much on it, but it’s nice to have for peace of mind.”

Mortgage rates are at record lows, so refinancing could also be a smart financial decision. Stopera said, “Throughout this past year, we’ve saved people an average of between $600 and $900 a month because of the difference in the interest rates right now.”

No single investment strategy will work for everyone, so it’s important for seniors to develop a relationship with a financial services provider who can tailor an investment plan to fit their needs.

Find someone you can trust, Stone advised, and when meeting with an adviser, bring along a friend or family member who can provide a second set of ears. “There’s lots of different alternatives, and everybody’s got different needs. You need to think through what is best for you,” he said.

Judith Connors, 71, of Scotia, has been working with an investment firm for years and is happy with the guidance she has received.

“They have really kept my head above water. They put me in a mutual fund program that has not changed. I’m a long term investor, and I found that was the way to go. So when the stocks are tumbling, I’m tumbling also, but not as much as most people are, and then I kind of get back into the groove again,” she said. “For me, it has worked out very well.”