Friday, June 01, 2012

Longing for Higher Interest Rates

Over the next year, the last of our 4-5% CDs will mature.   Unfortunately, the rates for new CDs are much lower, at less than 1% for less than 2 years and about 1.7% for 5 years.   Not very attractive interest rates.   While low interest rates are "helping" the economy, the same low interest rates have a negative effect on retiree income.

For example, at a 5% return (which was available in 07/08), $1 million will yield $50,000 in annual income.   Nowadays, the same $1 million will yield between $2,000 and $17,000 annually for a one and five year CD, respectively.  Quite a big difference for those that depend on fixed income investments.

CD rates have become so low that I don't even seriously consider investing in a new one as our existing CDs mature.  I just leave the money in an .05% money market account.    I figure that is a better short term place for our cash, rather than locking up the funds in a 2 year CD for less than 1% .

However, for now, it appears the Fed policy will keep interest rates low through 2014.    Maybe at that time, we'll start seeing 5% interest rates again.

For more on Reaping the Rewards, check back every Friday for a new segment.

This is not financial or investing advice. Please consult a professional advisor.

Copyright © 2012 Achievement Catalyst, LLC


Kurt @ Money Counselor said...

With interest rates so low for so long, one begins to wonder whether their allegedly stimulative effect is more theoretical and real. Also, what about the anti-stimulative effect of the reduced consumption of all those who depend on CD interest and similar to pay their cost of living?

Super Saver said...

To me the stimulative effect of lower interest rates for individuals is questionable. Even though rates are historic lows, people don't qualify for loans as much anymore. For example, in 2009 I tried to refinance to a lower rate a mortgage in which we had 60% equity, payments up to date, and regularly made a additional large principal payment each year. The bank refused even though we had never missed a payment. Disgruntled, I just paid off the mortgage. And I will never do business with that bank again.

AS said...

Unfortunately a return to 5% interest rates will only occur either as a reaction to very high inflation (which many have been predicting for years, back to the Greenspan days, as the consequence of all the cheap money), in turn triggered by very low unemployment. With unemployment around 8% and stalemate in Washington until after the election, that's unlikely too.

However, why not consider online bank accounts where you can earn 0.75% or thereabouts rather than 0.05%?

Super Saver said...


I've tried an online banking account and don't like the additional effort for another on going account with a little more interest. For now, I'll suffer having low interest rates, which can't last forever :-)