While a number of Americans, especially home owners, can benefit from the lower rates, the cuts are hurting a certain group of citizens — seniors who rely on interest income to make ends meet.
The Early Show financial advisor Ray Martin shared some advice Thursday for older Americans to balance their financial future despite the lower interest rates.
Martin said many retirees and older Americans who opted for more conservative investment plans are now faced with diminishing returns on what they thought would be safe and secure income in their later years.
Faced with reduced interest incomes and rising standard of living costs, many seniors are either forced to cut back on the "extras" in their lifestyle or are now trying to find new ways to generate better interest on their investments.
Martin said interest rates in the treasury bill was 6 percent in 2000, but today it's about 1 percent — an 83 percent drop in income for some. Most seniors, according to Martin, live on three sources of income, which have been traditionally called the three-legged stool. Seniors may rely on social security, a pension from former employers and, if they saved some money, interest or dividend income from saving accounts to survive.
Martin said the current rate change affects Social Security. The money for retirement is indexed and goes up each year with inflation. The increase was only 1.4 percent this year. So, if you were getting $1,000 last year, then you're only receiving $1,014 a month this year.
Most traditional pension plans do not increase with inflation. If you retired with $500 a month, 10 years ago, then you are still getting that same $500 a month. And you will continue to get that same number annually.
Martin explained as we get older, the cost of living increases. Retirees, he said, tend to have four major expenses. Their biggest expense is prescription drugs. The drug cost has increased 17 percent over the past year. Another major expense for seniors is medical insurance, which increased 15 to 25 percent in the last year. Many retirees have complained about the 10 to 20 percent increase in property taxes — depending on the place of occupation. And the increase of home owner's insurance, which increased 13 percent nationally in the last year, haven't made things easier.
Martin says seniors should not expect the rates to go back up immediately, and the cost of living for them may most likely remain the same. So, the elderly have to be proactive with their funds.
To look out for the senior's best interest, Martin suggests they look into the following investments:
Bank CDs: In 1 or 2 years, bank CDs mature and the interest rates may grow to one to 3 percent.
High Quality Corporate Notes: These mature in 2 to 5 years. Interest rates can rise anywhere from 2 to 5 percent.
High Dividend Yielding Stocks: Interest earned from these stocks can range anywhere from 2 to 5 percent. And, seniors can get the dividends quarterly.
High Dividend Yielding Stocks:
- Eastman Kodak (EK)
- Teco Energy (TE)
- Tupperware (TUP)
- National Grid Transco (NGG)
- SBC Communications (SBC)
- DuPont (DD)
- Kimberly Clark (KCDMY)
For seniors, Martin advised to avoid investing new money into long-term bonds (a bond that matures in 12 years). He says seniors risk losing money when interest rates are lowered, which causes long term bonds investments to fall in value.
Martin also said to avoid investing in high cost or speculative investments. He stressed that seniors should avoid investing in fixed annuities, junk bonds, growth stocks and REITS (Real Estate Investment Trusts).
Smart financial planning for an unpredictable future can only help.