But older Americans aren’t the only ones hunting for higher returns on their investments. Fed governor Jeremy Stein recently noted that institutional investors are also “reaching for yield” with increasingly speculative products, such as corporate bonds and real estate trusts. Such actions can create bubbles that destabilize the entire economy, he said — as evidenced by the most recent financial crisis.
Fed Chairman Ben S. Bernanke has defended low rates by arguing that they provide a paradoxical benefit: They help spur demand to get the economy back on its feet, which will eventually result in higher interest rates across the board.
Retirement benefits over the years.
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“You’re not gonna get strong returns in an economy that is fundamentally weak,” he said before Congress. “The best way to get sustainable high returns to savers is to get the economy back to running on all cylinders.”
And some risk-taking has paid off. Stock markets have reached new highs, partly because weak returns on bonds have pushed more investors into equities. In fact, some risk may be a necessity as life expectancy grows.
John Sweeney, head of planning and advisory services for Fidelity Investments, said the firm generally recommends that clients entering retirement budget for another 30 years. And the only way to make their money last that long is to invest in the markets. Sweeney said a typical portfolio for a 65-year-old includes at least 50 percent equities, 40 percent in fixed income and 10 percent in short-term bonds and cash.
“Even though [stocks] have been a volatile place to be . . . it’s important for them to understand the role of equities,” he said.
Still, some seniors are reluctant to take that risk. And low returns leave them with only two other options to make ends meet: work longer or spend less.
“There’s just no way to get a higher interest rate without taking some sort of risk,” said Eleanor Blayney, consumer advocate at the Certified Financial Planner Board of Standards. “And at the extreme, some of these higher interest rates aren’t really true.”