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Low interest rates forcing some to delay retirement

(MoneyWatch) Interest rates are so low that one in three investors say they will have to delay retirement, according to a survey published today by Wells Fargo and Gallup. Meanwhile more than a third of retirees fear that they will outlive their retirement savings.

The survey, dubbed the Wells Fargo/Gallup Investor and Retirement Optimism Index, also shows a steep drop in investor sentiment since February, not a big surprise given the poor showing of both economic indicators and the stock market, as well as the meltdown in the Eurozone. The survey was conducted in early May.

Despite their dour mood, investors are wealthier than they've been since the financial crisis. The Federal Reserve released data today that showed the net worth of U.S. households had risen by $2.8 billion, the biggest jump since the crisis began. Still, at $63 trillion, American households are still worth $4 trillion less than they were at the peak in 2007.

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Despite the fact that the market has doubled off its March 2009 nadir, retirees are struggling as they try to generate income in a low-interest rate world, "particularly when core inflation rate growth is about 3 percent a year and CDs ... are yielding less than 1 percent," said Karen Wimbish, director of Retail Retirement at Wells Fargo.

This is an issue that bloggers have been writing about for years, and while it's not easy, there are ways to generate income in retirement. One thing not to do is to put all your money in risky investments such as high-yield bonds in order to get higher payouts. As respected market strategist Ray DeVoe put it, "More money has been lost reaching for yield than at the point of a gun."

One strategy recommended by Steve Vernon is to divide your savings into two investments: an inflation-adjusted immediate annuity and an investment that provides managed payouts.

An annuity is an investment that provides a guaranteed payout for as long as you live. While the return on investment is low if you have a short lifespan, many investors like the comfort of knowing that they won't outlive their cash. And adding the inflation adjustment (which means lower payouts in the early years) protects you as the purchasing power of a dollar declines over time.

A managed payout fund, meanwhile, does not come with the guarantees of an annuity, but allows you to build wealth if the underlying investments perform well.

MoneyWatch blogger Allan Roth has written about how to find thebest payouts on CDs.  He's found rates as high as 2.7 percent. Those high rates are only on longer term CDs (5-7 years), but Roth offers a strategy for getting a good return without tying up your money. He suggests that you only invest in CDs with small penalties for early withdrawal. If the penalty is only, say, two-months interest, you can cash out early, pay the penalty, and you're still better off than if you'd invested for a year at 1 percent.

To further protect yourself, split your savings among multiple CDs. That way, if you need some money, you can cash out one while leaving the others intact, and pay a smaller penalty.

The silver lining: While low rates are likely to remain a challenge, the pessimism on display in the Wells Fargo survey could be good news for anyone who owns stocks. Investor sentiment is a fairly reliable contrarian indicator -- the market turns in its best performance after periods when investors are gloomy.