Lower interest rates are on the way, and seniors may be none too happy.
In another measure to jump-start the economy and encourage capital investment and job creation, the Fed has announced its intent to purchase $600 billion in Treasury bonds. For those who are a little rusty on monetary policy, this move injects cash into circulation, which banks will have available to lend at lowered interest rates. With unemployment at nearly 10 percent, inflation growing anytime soon is highly unlikely.
But let's think for a minute. Lowering interest rates by providing more loanable funds (which is what the Fed is doing), may sound good to the homebuyer or the small business owner. But the other side of the equation is the rate of return on savings. Although the Fed uses this monetary intervention to lower interest rates, there are also hundreds of million or borrowers and savers out there conducting transactions on a daily basis. When there is plenty of money to lend, but nobody is borrowing, banks are going to pay little interest on time deposits. This makes sense, right? When you put money into a savings or checking account, you are providing banks with loanable funds, but if nobody's borrowing and banks are not making money off of loans, they ha
ve little incentive to pay you for your contribution. This is the market for money, and it is all about supply and demand.
So what does this have to do with seniors? While the Fed tinkers, risk-averse seniors who have investment income they rely on to supplement Social Security are frantically looking for places to put it where it will pay a decent rate of return. Bonds? C.D.s? Well, if there is a rate of return called “diddly squat,” that is about what these investments are paying. Low rates of return may have seniors putting their money under the mattress, as was common during the depression. I never thought I would say this, but mattress investing may be prudent at this point (see my argument against mattress investing in an earlier piece, “Is the Mattress a Good Place for Money?”). But there is one lesson to be learned in all of this. Seniors or soon-to-be retirees who are accustomed to playing it safe may want to look at other investments, such as equities. If a person retires today at age 65 and lives to be 100, there are 35 years of potential investment opportunities for that individual. It would be a shame to put all of one's nest egg in the “safe” basket.