Monday, April 4, 2011

When It Doesn't Pay to Be a Saver

I adopted my oldest daughter in 1979. Because her birthmother had died, and because her birthmother had a work history, this child received Social Security. For the first couple of years I invested the social security payments in CD's every month. What I remember the most strongly was being disappointed when the interest rate fell below 10%. It just didn't seem fair!

I was reminded of those glorious interest rates (carefully forgetting the double digit inflations rates also in effect in the early '80's) when I read this article from the Wall Street Journal. (Thanks to Boston Gal for the link.)

While the feds have necessarily held the line on interest rates for the good of the general economy, that line has not been at all kind to savers, particularly retired savers who were counting on interest rates to provide income without invading principal. These days, one feels good if interest rates break 1%, and mostly, they don't.

Boston Gal wondered why some of those interviewed didn't consider working, at least part time. That hardly seems like an option for the 91 year old retiree with whom the article opened. But I'm guessing that most of the folks in the two Florida retirement centers came there from somewhere else, and that employment opportunities are not as available as they might have been had they stayed in the communities where they were formerly employed.

It's my understanding that, as a whole, we are all saving more these days. But I didn't realize that these statistics include debt reduction as a form of saving. It is, but that doesn't mean anyone's bank account now has more cash in it.

On a very personal level, I ran the Socal Security calculator to see what I could expect. From Social Security alone, I would get $1398 right now if I retired. Not only is that not enough, but I'd have to pay for health insurance to cover me until Medicare kicks in in three years. If I wait until age 66, I'd have approximately $1962 per month and access to Medicare. And if I wait until my projected retirement date when I'm 69, I should get around $2700 per month.

Right now, I live on approximately $3600 per month since I put away over $1000 a month into my 401(k).

Financial Engines projects that I will have $404,000 in my 401(k) by the time I'm age 69. At 1% interest, that will add $336 a month to my income. At 4% (which is the figure most retirement calculators use for regular withdrawals), I would have an additional $1347 a month.

With that kind of income plus the sale of my rental home to provide the basis of a travel/entertainment fund, I should be fine.

But then, the retirees in the article thought they'd be fine as well. Having had the foresight to save on a regular basis, they are now feeling punished. Not only does this have political repercussions (because retirees vote more often than the general populace, particularly when they are unhappy) but it discourages saving among younger citizens. As the authors of the article note, low interest rates "also penalize people of any age hoping to build up funds for the future, and discourage rainy-day savings that could make U.S. consumers more resilient to job losses and other financial jolts."


Anonymous said...

Ugh! I have a few CD's coming due within the next 2 years. They are paying 3% and I was lucky to get that!

I retired at the age of 50 because I was making enough money passively from my investments. Who would have thought that 10 years later I would not be making as much money and had to go back to work. it is useless to say "Oh! I should have kept on working!" That's hindsight and not productive.

The point is you have to work until you are physically not able to work anymore. To me, that's the new explanation of what retirement really is.

69 is about right. 70 would be better. In 12 years, my husband can retire fully. That means I have to work 12 years more to keep pace.


Roberta said...


Anonymous said...

Inflation rates were pretty high when interest rates were 10% too! So were mortgage rates.

Having lots of savings is still better than relying on just Social Security, even if they're not earning that much.

Living Almost Large said...

A 4% withdrawal rate is very conservative. It assumes I think not touching the principal. Of course there is the idea that you could take 8% and tap principal.

My family currently lives on $4k/month or less than 40% of our gross because of savings. And we have a mortgage, car payment, and student loans. It's tight but doable. But that's probably going to be our saving grace. That we live on a tiny portion of our money.

Barb said...

As a Forced retiree who lost her job-I would happily get a job if I could-

Anonymous said...

Selling the rental property would probably be foolish. Your rate of return is probably better than you can get from other investments, even those with more risk, and you likely have some tax shelter from depreciation left. As the house is a rental, you would have to pay capital gains on the appreciation and ordinary income tax on the depreciation recapture if you sell it. As long as it is in a decent area and is highly rentable, I would keep it.

Grace. said...

Anon--I have about 8 years of depreciation left on the rental. In the meantime, it has been declining in value though it is still worth far more than I paid for it 30+ years ago. So I'll be hanging onto it until I retire. At that point, I probably will sell it to provide me with a travel fund. Or not--these ideas are always changing.

Salis Grano said...

It's a similar situation in the UK. Lots of disgruntled savers who thought their income from deposits was safe. I'm sympathetic, but only so far. The principal is guaranteed, unlike stocks, but if you don't take the risk should you get the reward? There is also the question of patience. Returns need to be thought about over the long term.

Anonymous said...

This makes me so sad - they saved all their lives and now no one is looking after them. That's not right!

I've been running our retirement numbers, but given that interest rate is so meager right now, the amount I need to contribute keeps rising.

MasterPo said...

There are literally MILLIONS of Americans - not only seniors! - who count on the income from CD's and bonds to pay monthly bills.

Forcing low rates is robbing these people blind!

Add in the forced rise in food and energy and it's theft!!

Financial Independence said...

Just out of curiosity - you are counting on rental income, what if the property wont rent for a six months?

The rental is very unpredictable and unless it is a completely discretionary spendable, it is a scary thing to count on it.

I have a feeling that you should have to divide everything by two, when counting on any additional income, if they say 4%, it is only 2%.

Grace. said...

I'm not counting my rental income once I retire. Although it has been a steadily rented property (because I price it slightly below market), I plan to see it when I retire and use the proceeds as my retirement-travel fund.

Grace. said...

Oops! That would be SELL, not see!