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CDs, money-market accounts yield little for retirement

| Monday, Aug. 4, 2003

More senior citizens live in the Alle-Kiski Valley than in almost any other region of the country, so it comes as no surprise that a large number of local residents are scrambling financially every time the Federal Reserve cuts interest rates.

Retirees across the country who have opted to place their money in what they deemed were stable certificates of deposit and money-market accounts, with a plan to live off the interest, gradually have found themselves in dire economic straits.

“Without a doubt, the folks who are depending on the interest have been hit the past two, two-and-a-half years,” said Ben Benack, vice president of marketing for Dollar Bank in Pittsburgh. “There's no denying the (lower) interest, they're just going to get a smaller chunk every month.”

The Federal Reserve has cut interest rates 13 times since the end of 2000 in an effort to stave off an economic slide that has lasted even longer. While the cuts are designed to spur growth and generate spending — myriad individuals have refinanced their homes thanks to the low rates — the elderly living off of interest income have struggled.

The cuts have been so drastic and come seemingly so often that the federal funds rate that stood at more than 6 percent on May 16, 2000, now resides at 1 percent.

The federal funds rate is the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight. In formulating monetary policy, the Federal Reserve sets a target level for the federal funds rate.

When the federal funds rate is cut, the effect eventually trickles down to certificates of deposits, or CDs, and money-market accounts. These methods of saving and generating money have been devastated during the past three years.

A one-year CD purchased three years generated more than 6-percent return of the money. Today, a one-year CD pays back at little more than 1 percent.

Money markets have been worse. An average money-market account today returns between a half and 1 percent of the total compared to more than 6 percent three years ago.

It's easy to see why retirees who moved their money from the stock market to CDs and money markets are panicking and declined to be interviewed for this story.

“It affects CDs and money markets,” said Barbara Dickman, a broker who also works with AARP, the nonprofit organization formerly known at American Association of Retired Persons. “But it's not a bad idea to cut those interest rates (to help) the whole economy.”

All is not lost, though, for the elderly and those quickly closing in on retirement. Benack said they could invest in long-term accounts with slightly higher interest returns such as two-, three- and five-year CDs.

If interest rates rise, money in a one-year CD that matures can be re-invested at a higher rate. If interest rates drop, money in the two-, three- and five-year CDs are protected and already earning money at a higher rate.

“It's a strategy,” Benack said. “It's a great way to build some protection in.”

Other avenues also exist.

Dollar Bank, for instance, offers what it calls a Premium Passbook Savings account in which a 2-percent return is guaranteed on balances of more than $5,000.

Tom Defilippi, a representative with New York Life in Harrison, said his insurance company offers annuities guarantee a rate for the life of the contract.

“You try to match up what they should be doing with the risk they're willing to assume,” Defilippi said. “The last year and a half, I've dealt in guaranteed stuff.”

For those who left their money in stocks and consider earning 1 percent on their money much better than losing at a 20-percent clip, Dickman said don't bother.

“If they already have their money invested in the stock market, leave it there. You've probably hit bottom. Just ride it out,” she said. “When it goes back up, that's when you'll get rid of it.”

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