The government’s fiscal policies punish savers, asserts Sharon Kimball, who retired from the federal government in 2018 after almost 30 years. Kimball, 66, is a regular reader who has long stayed away from investing in equities. For her retirement account under the federal Thrift Savings Plan, she put all her contributions into the G fund, which is invested in short-term U.S. Treasury securities.
Kimball’s other retirement savings have all been placed in certificates of deposit (CDs). The Virginia resident said she just couldn’t stomach the roller-coaster ride of investing in stocks or mutual funds. Her hope was for the CDs to produce just enough interest to offset any impact of inflation.
Rates on CDs and money market deposit accounts, which are insured by the Federal Deposit Insurance Corp. (FDIC), were pretty puny before the spread of covid-19. But things are about to get even worse for savers who have sought refuge in these federally backed accounts.
“I understand that people, including my children and myself, need to be able to borrow at rates they can afford,” Kimball said. “But it has seemed to me that there is little to no appetite for rewarding those who scrimp and save over the years. Some of my CDs in the latter years of my working life were earning 0.05 percent. How can you retire on that?”
Just a few decades ago, it was commonplace to see double-digit returns on CDs. But the downside was that relatively high inflation outpaced the gains in purchasing power.
At one point, in the early 2000s, Kimball was happily getting as much as 5 percent on her CDs, she said.
But in response to the 2008 financial crisis, the Fed dropped the federal funds rate, and savings yields soon plummeted — falling below 1 percent.
Kimball was content when CD rates finally began to climb again, and she celebrated when yields surpassed 2 percent. On April 1, 2010, the average five-year CD was paying 2.12 percent, according to Bankrate.com.
A year ago, if you put $2,000 in a one-year CD, the average interest rate was a measly 0.98 percent, earning just $19.60. If you wanted to lock in your money for five years, you could get about 1.5 percent.
As of last week, the average rate for a 12-month CD had fallen to 0.57 percent, with a payout on $2,000 of $11.40, Bankrate.com found. The rate for a five-year CD was 0.86 percent. Now compare those rates with the annual inflation rate, which in February was 2.3 percent.
“CD yields are in a full-on retreat, given how the Fed has been aggressively cutting interest rates since the beginning of March,” said Greg McBride, chief financial analyst at Bankrate.com. “Yields are falling, and they’re going to continue to fall.”
McBride recommends that if you’re trying to eke out every bit of interest on a deposit account, shop around for the best rates. Look at institutions that may have only an online presence but are still backed by the FDIC.
I’m hearing from so many people who are either already retired or are close to retirement. These folks are worried that they don’t have the time to wait for a recovery in the stock market. They’re stuck between a rock (low deposit rates) and a hard place (a bear market).
Kimball and her husband acknowledge that they’re in better shape than many of their peers to weather the current economic storm:
● They don’t have a mortgage.
●They don’t have credit card debt.
●They still have a bit of their money in the stock market, recognizing that they could live three or four decades in retirement, and their future financial needs would require that they still invest for some growth. Kimball’s husband, Bob, has about 20 percent of his own TSP savings in the stock market. “My hope is that this will be a one- or two-year blip and that the economy will ultimately recover,” he said.
They lived well below their means and saved as much as they could, Sharon Kimball said, adding, “Although I’m scared to death because I’m old, we were saving for something horrible. And Holy Toledo, here it is.”
Have a question about retirement or personal finance? Join Michelle for an online Q&A every Thursday at 12 p.m. ET. Readers may write to Michelle Singletary at The Washington Post, 1301 K St. NW, Washington, D.C. 20071 or firstname.lastname@example.org. To read previous Color of Money columns, go to http://wapo.st/michelle-singletary.