Here’s a common complaint I hear from seniors all the time:
Interest rates are so low that it’s impossible to earn enough cash to
supplement Social Security.
“Certificates of deposit don’t earn anything,” writes
MarketWatch reader Camille: “Until the mid-2000s, you could easily earn 4% on a
certificate of deposit (CD). Today, your money does not earn anything, which
penalizes small savers and seniors.”
She’s right. Based on rates as I write this, if you put $500
into a one-year CD, you’d get back about $502.76 in 12 months. Wow! Two whole
dollars and 76 cents! Probably enough for a loaf of bread or a gallon of gas,
but not much else.
Low interest rates are a double-edged sword. If you’re
borrowing money, it’s obviously good, but if you’re trying to make a few bucks,
no. And this isn’t likely to change in any significant way, given the Federal
Reserve’s recent announcement that it plans to keep its key “Fed Funds” rate
low until the economy and jobs market picks up steam.
Since things like money-market funds and certificates of
deposits are tied to the Fed, that’s tough news for anyone hoping to squeeze
more out of their savings.
Meantime, those paltry returns stand in contrast to things
that keep shooting up, like the cost of healthcare. I recently reported that
drug prices, for example, are rising much faster than inflation, and much
faster than the cost-of-living adjustment that seniors typically get from
This one-two punch—more money going out and less coming
in—is punishing seniors, pushing many closer to, if not into, poverty.
The need to earn more has nudged some seniors into the stock
market, which in and of itself isn’t necessarily bad; financial advisers
typically say that given the possibility of decades in retirement, even seniors
should have some exposure to equities. But with stocks at nosebleed levels—the
price-to-earnings ratio on the S&P 500 SPX, 0.46% is up 80% from a year ago—caution abounds. As
usual, I’ll emphasize that how much a retiree should have in stocks depends on
factors like age, risk tolerance and so forth, and is best discussed with a
trusted financial adviser.
It’s often tempting when rates are super low like now to put
cash into things with fat dividends, but “you have to be very careful,”
cautions Andrew Mies, chief investment officer of 6 Meridian, a Wichita,
Kansas-based wealth management firm. “Saying I’m going to go buy a high
dividend-paying stock or MLP (master limited partnership, an investment vehicle
common in capital-intensive businesses, like the energy sector) were disasters
in 2020. Buying high-dividend stocks was one of the worst performing strategies
you could have had last year, and some MLPs were down 30-40%.”
In other words, what’s the use of buying something that pays
a dividend of 8%, 9% or more—only to see the stock itself plunge by a third?
One market strategist, the late Barton Biggs of Morgan Stanley, once said “More
money has been lost reaching for yield than at the point of a gun,” and he was
right. Echoing that is none other than Warren Buffett, who has called reaching
for yield “stupid,” but “very human.”
So what to do?
Mies urges something that many people have trouble with:
Patience. That’s because rates, all of a sudden, appear to be moving higher,
and if you can wait a bit, you just might be able to find safer investments
that yield more than you might be able to get now.
He’s right. As of Friday, the yield on the 10-year Treasury
bond stood at 1.34%, hardly robust, but up from 1.15% for the week. Two things
to remember here: When bond rates go up, bond prices go down; higher bond
yields can also make stocks less attractive on a relative basis as well.
Mies thinks rates will continue to climb. “I think you’re
going to have a chance in the next 12 months to put money to work at higher
interest rates.” Buying or selling are choices, but so is doing nothing, so “I
do think that not getting aggressive right now is probably the most prudent action.”
And after rates go high enough, he thinks municipal bonds
could become more attractive, corporate bonds could, Treasurys could. “There
will be pockets of opportunity that pop up.”
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