Your Finances: Combating low returns

The national average interest rate on a one-year

The national average interest rate on a one-year CD is 0.25 percent, according to Bankrate.com. Ten-year Treasury notes are yielding less than 2 percent. (Credit: iStock)

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It isn't like Federal Reserve Board chairman Ben Bernanke and his colleagues have it in for old people -- I'm sure they are all very respectful of their elders.

But their policy of holding interest rates as low as they need to be to keep the economy in modest growth mode is also hitting Grandma and Grandpa particularly hard: At ages when most people try to keep their money "safe" in bank certificates of deposit and bonds, retirees are having to contend with returns that would be considered laughably bad if they didn't have to cover groceries and Medicare co-pays.

The national average interest rate on a one-year CD is 0.25 percent, according to Bankrate.com. Ten-year Treasury notes are yielding less than 2 percent.

What's an income investor to do? Here are a few thoughts.

Go back to basics. Review your allocation -- the percentage you keep in stocks and the percentage you keep in bonds and cash. Even if you are an oldster (define that for yourself), you can't afford to keep all of your money in CDs, bonds and other fixed-rate investments. If you assume that you're going to live for at least five years (or you want to leave money to your kids), then you still need to keep money diversified into other less nominally "safe" areas, like stocks, real estate and foreign investments.

Remember that every stretch is a risk. Buying stocks and cashing dividend checks for income can be more rewarding than bonds, but those shares could lose value. Using mutual funds to buy arcane bonds issued by foreign governments or low-rated companies can get you more yield but higher risks of default. Spread the risk around. The more different income-producing types of investments you have, the less likely they are to all head south at the same time.

Beware of "solutions" you don't understand. Locking in a long-term return when rates are at historic lows doesn't seem like a good idea, yet that is what fixed annuities and similar insurance products offer. New multi-asset and "go anywhere" mutual funds can carry high fees without eliminating all those risks mentioned above.

Spend less, and keep the faith. If you're earning a lot less than you expected to, cut your budget. That will preserve more of your principal for when interest rates do rise, and you can start collecting more income again.

After all, if you are old enough to be retired now, you remember when the prime rate was over 20 percent, and experts agreed we would "never again" see single-digit mortgage rates.

Anything can happen, so keep your powder dry.

 

KEY STEPS

 


Even though interest rates are low, remember that every stretch for more yield carries risk. Buying longer-term bonds and CDs to squeeze out more return will cause you problems when rates rise and you can't get your money back to buy a new higher-rate instrument. Spread the risk around. The more different income-producing types of investments you have, the less likely they are to all head south at the same time.


Beware of "solutions" you don't understand. Locking in a long-term return when rates are at historic lows doesn't seem like a good idea, yet that is what fixed annuities and similar insurance products offer. New multi-asset and "go anywhere" mutual funds -- designed to give fund managers the broadest possible leeway in bond and other markets in the search for income -- can carry high fees without eliminating risks.


Spend less, and keep the faith. If you're earning a lot less than you expected to, cut your budget.