Federal Reserve actions hurt retirees

[Leon44]

Here is an interesting article detailing why the Fed's manipulating of interest rates adversely affects retires. I'm sure most of the readers on these boards are already aware of these affects.

6 ways the Fed hurts retirees - 1 - - MSN Money

Many retirees have played by the rules and lived below their means to build a nest egg to provide income to them in later years. Unfortunately they are not getting much of a return in traditional “safe” vehicles that many retirees typically use.

Hopefully the Fed can manage to get interest rates back to market based rates without crushing bonds & equities.

[HighRoller]

I would think this is all pretty much old news to most folks on this board. Remember, the US government is here to help.

[clifp]

When I consider all of the wars which the government has waged over the years, against alcohol, drugs, terror, poverty, crime... etc, most of them have had a mixed record at best and few outright failures.

Bernanke and company have been conducting the war on savers with great skill.
Right now the governments war on savers has been a rout and it pisses me off.

[HighRoller]

Quote:

Originally Posted by clifp Right now the governments war on savers has been a rout and it pisses me off.

Well said - +1

[Leon44]

It will be even worse if folks chasing yield through bond funds and high dividend stocks like utilities continue to lose principle as the long end of the curve goes up.

At least some folks got artificially low mortgage rates

Perhaps the Fed will cause another housing bubble......

[Lancelot]

In the 1980s I paid 12% interest for my first home mortgage- and retirees were doing OK parking their savings in Money Market accounts. Now younger folks are getting very attractive mortgae rates (coupled with relatively high home prices) and savers are taking it on the chin.

It is what it is. As a retiree, personally speaking, I'm still happy

[bUU]

Quote:

Originally Posted by HighRoller Remember, the US government is here to help.

The Federal Reserve is, very deliberately, independent from the US government. It is likely that if those aspects of linkage to the US government that are in place were removed, then the Federal Reserve would take actions even more damaging to savers.

[Midpack]

Low interest rates certainly "hurt" savers including some retirees. But low interest rates benefit anyone buying a home or car (even some retirees don't pay cash) and encourage businesses to borrow for capital expenditures/expansion among other benefits. That helps the economy. Retirees benefit from a healthy economy (equity returns for example) like everyone else. Would retirees be better off with higher interest rates and a shakier economy? They are related. Calling Fed policy RE: interest rates a "war on savers" is to deliberately miss el photo grande.

And was there also a thread on the tax benefit we've gotten paying ZERO taxes on LTCG and qualified dividends on taxable income up to $72,500 for married filing jointly? That would also include a lot of retirees...

[obgyn65]

Agree, but at least present retirees, or the majority of those in their 60s, are pretty certain to get their full SS benefits as promised. You also had very good opportunities in the past to lock on much higher annuity rates, which IMO are unlikely to happen again. However, those still in their 30 or 40s like me are quite certain not to get their projected SS benefit. And annuity rates keep going down.

Also, past actions from the Fed have allowed many, many retirees who bought their houses 20, 30, 40 years ago to make a huge profit. Not the case today.

Quote:

Originally Posted by clifp Bernanke and company have been conducting the war on savers with great skill. Right now the governments war on savers has been a rout and it pisses me off.

[eytonxav]

While I do not like the protracted artifically low rate environment, I also do not like how the market reacts in the negative when the threat of stimulus being withdrawn due to on an improving economy affects the market.

[HFWR]

Pining for the good old days of 10% CDs misses the point that inflation was likely eating away much of those returns...

[pb4uski]

Yes, it is very discouraging that my diversified (~60/40) retirement nestegg has only earned 7.31% (annualized) YTD, 11.68% for the last 12 months, 13.40% per annum over the last 3 years and 6.72% per annum over the last 5 years. Wellesley's 1, 3 and 5 year returns are similarly robust.

Fire the bums!

Seriously, while it is true that the Fed's actions have hurt certain fixed income investors the returns of a diversified portfolio have been pretty good, due in part to the Fed's actions. And I'm not even totally sure of the hurt on some fixed income investors as returns for BND for the 3 and 5 year periods have been reasonably good (3.35% and 5.13% per annum respectively) although return for the last year has been negative.

Certainly, CD and bank savers have been stuck with low yields, but in part because they haven't diversified or those bemoaning the Feds actions are not looking at the big picture.

[jollystomper]

It is easy for me, now that I'm the borderline of retirement, to be frustrated with the low returns on income producing investments. Just as it was easy for me to be frustrated 30 years ago with the high returns on income that also resulted in a 13% mortgage rate for my first house. It is all a matter of perspective.

[Independent]

I don't like low interest rates, either. They are costing my money.

But, I can wax philosophical: All four of my kids have mortgages. They've all got rates that I couldn't even dream about. So I figure the Fed's transferring money from me to them. Since I planned to leave them something when I died, they're just getting it a little sooner.

[clifp]

Quote:

Originally Posted by Midpack Low interest rates certainly "hurt" savers including some retirees. But low interest rates benefit anyone buying a home or car (even some retirees don't pay cash) and encourage businesses to borrow for capital expenditures/expansion among other benefits. That helps the economy. Retirees benefit from a healthy economy (equity returns for example) like everyone else. Would retirees be better off with higher interest rates and a shakier economy? They are related. Calling Fed policy RE: interest rates a "war on savers" is to deliberately miss el photo grande.

I think you are mixing up savers and retirees. A saver to me is somebody who achieves or maintain FI by spending a lot less than they earn. Because they are risk adverse, they put their money in safe simple investments, bank CDs or in the old days government savings bonds.

This board has a fair number of natural investors like myself, but very few pure savers like Obgyn and even hanging around this crowd convinced the guy to stick his toe in the investment world. We do have a lot of reluctant investors, people who would prefer to have a limited exposure to bonds, and even more limited exposure to stocks. But they'd rather retire early and to so they've become investors. But if CD were paying 7-8% and no one was predicting inflation over 3%,they'd move bulk of their money to CDs in a heartbeat.

Most Americans are spenders. But there is a large group of pure savers. Sure maybe they stick some money in index fund or target retirement fund in their 401K but that is only because they have been told they have to.

A booming stock market doesn't help savers practically at all. Even a good economy is of a limited value. As long as the economy isn't doing so bad that banks are failing and the FDIC fund solvency is threatened, or their job is in danger. They are much better off in a slow economy with no inflation or even deflation. This is especially true of retirees.

The war on savers has been so relentless, that many savers have capitulated and become investors. But they are awful investors, pouring money into overpriced bonds funds in the last few years. Like the chap who posted recently concerned that is Vanguard intermediate bond fund is dropping a a dime a day. Or my 77 year old friend, who thinks the stock market is a rigged casino, but desperate for something that would make more than 1% CD, bought gold at $1700.

For the working Saver, the war has been ugly, they are being force to spend less/save more and generally push out their retirement plans. It is probably even worse for the Saver retiree who depends on interest from CDs along with SS and possibly a pension. Not only have they seen their interest income drop by 75%, but the bonds fund, they just purchased are starting to get hammered.

Now smarter people than you and I have debated the efficacy of the Fed's policy. I think the Fed did a good job from 2008-2010, not sure about the last couple of years. I don't think the Fed is deliberately trying to screw savers. But savers have suffered such fearsome collateral damage as result of the Fed's policy that I don't think you can call it anything other than a war.

[Midpack]

Quote:

Originally Posted by clifp Now smarter people than you and I have debated the efficacy of the Fed's policy. I think the Fed did a good job from 2008-2010, not sure about the last couple of years. I don't think the Fed is deliberately trying to screw savers. But savers have suffered such fearsome collateral damage as result of the Fed's policy that I don't think you can call it anything other than a war.

And I'd suggest a) you can't look at interest rates independent from the broad economy (which also benefits savers and retirees) and b) it's not the duty of the Fed to put interest rates and the impact on "pure savers" ahead of all other priorities. Hurting savers has been collateral damage unfortunately...calling it a "war" when it hasn't been deliberate (as you noted) may be a little myopic.

[Khufu]

The Fed Reserve hurt retirees most (along with the rest of the country) when Greenspan refused to stop the housing bubble, the inevitable collapse of which caused the Great Recession with the effects of which we are still living. Greenspan could have regulated the unregulated mortgage companies and he could have enforced minimum down payment requirements. He could also have regulated the derivatives market. All of this he refused to do.

Regardless of what the Fed did once the crisis hit interest rates were going to go down indeed to the point of negative real rates. The Fed lowered short-term rates to the lower bound of zero and then did its succession of Quantitative Easings in lieu of increased spending by Congress which is what was required, but, alas, not forthcoming. The QEs probably did not have much effect on the economy and very little on interest rates since the amount of bond buying has been so small relative to the size of the bond market.

While it may seem satisfying to identify an individual such as Bernanke as the enemy, in reality monetary policy doesn't have much effect in a liquidity trap and probably didn't in this case.

[eytonxav]

Quote:

Originally Posted by Khufu Greenspan could have regulated the unregulated mortgage companies and he could have enforced minimum down payment requirements. He could also have regulated the derivatives market. All of this he refused to do.

I am not sure all of this can be hung on Greenspan, as the SEC and Congress play a key role in terms of regulating the securities markets.

[Lsbcal]

Quote:

Originally Posted by Midpack And I'd suggest a) you can't look at interest rates independent from the broad economy (which also benefits savers and retirees) and b) it's not the duty of the Fed to put interest rates and the impact on "pure savers" ahead of all other priorities. Hurting savers has been collateral damage unfortunately...calling it a "war" when it hasn't been deliberate (as you noted) may be a little myopic.

I agree.

The Fed mandate is to focus on employment and inflation. Risk adverse investors are only a sliver of the picture.

[audreyh1]

Quote:

Originally Posted by Lsbcal I agree. The Fed mandate is to focus on employment and inflation. Risk adverse investors are only a sliver of the picture.

+2, including Midpack's statement.