Federal economic policy has driven down interest rates in an attempt to kickstart the economy, spur home buying and encourage business investing.
What helps borrowers hurts savers, however, and FDIC-insured bank accounts are yielding a fraction of the interest they were before the recession. South Jersey’s seniors on fixed incomes are feeling the pinch on every certificate of deposit, savings or money market account.
Interest rates locally and nationally are near historic lows and not expected to rise anytime soon.
“We’re probably looking at this for the next two to three years,” said Charles “Chick” Pinto, chief marketing officer for Cape Bank. “The only thing we can do is take our cue from the Federal Reserve, and they’re saying they believe the current interest rate environment will be like this through 2015.”
Low rates have been a headache for those who need the safest investments, mainly senior citizens, said Richard Barrington, senior financial analyst with banking website MoneyRates.com.
Someone with $100,000 invested in CDs might have lost more than $4,500 in interest annually the past five years, he said. That’s the difference between the nearly 5 percent annual average yield in 2007 and the less than half a percentage point now, he said.
“Percentages are something that we think of in math class. They’re theoretical. But the dollar figures bring it home,” he said.
Low interest rates since the recession have also affected South Jersey banks and the returns of their depositors.
On Dec. 28, several local banks’ websites listed comparable rates for one-year CDs: Cape Bank, 0.3 percent; Ocean City Home Bank, 0.45 percent; Crest Savings Bank, 0.5 percent; First Bank of Sea Isle City, 0.45 percent.
MoneyRates.com reported the average one-year certificate of deposit yielded 0.43 percent; the average savings account 0.2 percent.
These rates have not stopped people from putting money in banks, Pinto said. But it has altered where they put it.
Pinto said Cape Bank is seeing a 10 to 15 percent increase in deposits in savings accounts, partially due to people getting out of CDs — which have only slightly higher yields and are more restrictive.
“We believe the phenomena is that when the CD money matures, people are parking it in other accounts. The safest place to put it is a savings or money market account,” he said.
Eldora, Dennis Township, resident Florence McCart is among that category of investor.
“I didn’t bother buying any CDs because I figured they’d get more interest in a savings account,” said McCart, 70, a retired state tourism worker. “It’s a concern.”
“I’d be really screwed if I had a mortgage or a car payment. I think we all would,” said Carol Magee, 69, of South Dennis in Dennis Township, a retired housekeeper.
Bank savings are also about security. They are FDIC-insured up to $250,000, making them among the safest places to keep money and a popular option for retired people wanting to be conservative, Barrington said.
But with inflation outpacing these returns in the past few years, money in these accounts is losing purchasing power, he said.
Barrington said his company calculated that deposits over the past three years lost about $500 billion in purchasing power because rates were below inflation.
“You always need a ready reserve for some cash, certainly in terms of my business,” said Gene Doebley, 66, of Somers Point, partner of Doebley & Dad LLC home builders. “In a money market account, you’re getting half a percent — it’s just a safe place to hide it.”
Barrington said higher interest rates tend to be associated with stronger economies, and lower ones with weaker economies, he said.
“It’s bad for people who try to save for retirement because it means they have to save a lot more because their money’s not going to compound as fast. Historically, compounding previously would do some of the heavily lifting,” he said.
“The stock market has been unreliable, and interest rates disappearing literally next to nothing the onus falls back to saving money. Ironically, at a time when you have less incentive to save money, you have the greatest need to save money,” he said.
Mark Reimet, a financial planner with Ocean City Financial Group in Ocean City, said the top issue for retirees living on fixed incomes is their ability to maintain income and current lifestyles.
The issue of low interest rates has become pronounced, particularly as longer term CDs, which had higher yields, mature and investors face small returns in the current market.
“As CDs are maturing, we get that more and more. Now long term is becoming reality, that three-year CD is up and people have to reinvest and make enough money to make ends meet,” he said.
There are alternatives that carry varying degrees of more risk, including the loss of the FDIC insurance.
Reimet stressed that an individual’s investing needs vary based on many factors, including his or her tolerance to risk.
“If they can do that, there are nice alternatives that can give them potentially a higher income. But if they’re not going to be able to sleep a night, they’ll have to stay in,” he said.
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