Do lower CD/ MM etc interest rates matter?

[Beppington]

Many people are really bothered by the falling/ low interest rates being paid on their checking/ money markets/ savings/ CD accounts.

Does it really matter?

If it's falling across the board, and everyone is affected basically the same ...

[Ima saver]

Well, it really does matter to me. I hope to live on my interest some day.

I had a two year CD tied up at 4%. When the bank failed and another bank took over, they lowered my rate to 1%. In 2008. I earned close to $26,000 in interest. Now, I am earning half of that. I sure hope the rates go back up some day.

[GREENBACK]

It matters even if you aren't concerned with earning interest on these items because it's a key sign that the economy is in bad shape and the gov't is trying to prop it up by keeping rates low.

[jIM_Ohio]

Many people are really bothered by the falling/ low interest rates being paid on their checking/ money markets/ savings/ CD accounts.

Does it really matter?

If it's falling across the board, and everyone is affected basically the same ...

If it does matter, the person is taking on too much "interest rate risk". To solve this, invest in some things which do not change returns because interest rates were low or because interest rates change.

Real Estate, stocks and gold all come to mind as things to invest in when rates are low.

[disneysteve]

Of course it matters. When money that used to earn 5% now earns 0.5%, it matters, whether you are living on that interest or not.

everyone is affected basically the same

No offense, but I really don't care about everyone else. I care about me and my family and if we will be able to meet all of our financial needs and goals. A big drop in earnings on our savings impacts those goals.

And, as Ima mentioned, many people live on their investment income. My mother, who is 79, fits that description. She depends on interest from her CDs and other investments along with Social Security to pay her bills and living expenses. When the interest rates drop, her income drops.

Jim points out a big problem with low interest rates. They may encourage some people to take on more risk in their portfolios in an attempt to boost returns. That is when people get burned and explains why so many seniors fall victim to investment scams. They are struggling because their savings are earning next to nothing so they are more vulnerable to come-ons promising better returns. Even if they invest in legitimate vehicles, they ratchet up the risk level. Going from CDs to real estate, stocks and gold might boost the returns, but it also creates principal risk that didn't exist with the CDs and they could end up in worse shape than they were already in.

[Slug]

I guess as long as the gap between inflation rate and interest rate is constant over time, then I shouldn't care, but I don't think that was the point, and I don't think that gap is consistent so I care too.

[jIM_Ohio]

Of course it matters. When money that used to earn 5% now earns 0.5%, it matters, whether you are living on that interest or not.


No offense, but I really don't care about everyone else. I care about me and my family and if we will be able to meet all of our financial needs and goals. A big drop in earnings on our savings impacts those goals.

And, as Ima mentioned, many people live on their investment income. My mother, who is 79, fits that description. She depends on interest from her CDs and other investments along with Social Security to pay her bills and living expenses. When the interest rates drop, her income drops.

Jim points out a big problem with low interest rates. They may encourage some people to take on more risk in their portfolios in an attempt to boost returns. That is when people get burned and explains why so many seniors fall victim to investment scams. They are struggling because their savings are earning next to nothing so they are more vulnerable to come-ons promising better returns. Even if they invest in legitimate vehicles, they ratchet up the risk level. Going from CDs to real estate, stocks and gold might boost the returns, but it also creates principal risk that didn't exist with the CDs and they could end up in worse shape than they were already in.

Steve- my point was about portfolio construction, not to chase returns.


If a person only puts their money into one asset- whether it be real estate, stocks, bonds or cash- there is a risk to that. All eggs in one basket analagy.


Remember there is more than one type of risk, and my point was anyone which depends on interest rates has lots of cash or bonds in their portfolio. If a person has a lot of interest rate sensitivity, they also have inflation risk- meaning the longer they live, the less value their portfolio has year over year. The inflation risk comes because most (all?) cash based investments I am aware of have not kept up with inflation over time (if they had, everyone would use them).

The solution to this problem would be
a) increase the duration of the bonds held (for example if holding short term bonds, which give price stability/principal stability, invest in longer term bond funds. The downside to this is the value of the bonds fluctuates more, the upside should be a slightly higher return based on risks taken.
b) use a CD ladder to lock in interest rates. When rates are high, lock in long term, when rates are low, use a short term CD until rates increase, then lock in high rate again. If ladder was set up properly (say a 10 year ladder) then the need to time rates is minimal. If ladder is shorter (say 2-3 year ladder) then timing rates might be more important.
c) find less volatile investments than stocks for a portion of income generation. Real estate, REITs, gold, silver, dividend paying stocks, utility stocks all come to mind.

Not any single one of those solutions fixes the problem (too much interest rate risk), but adding even a 5-10% position in 2-3 of those will smooth out some of the interest rate risk.


Additional (random) points:

If a person plans on a 3% interest rate to live off of, when rates were higher, did they spend the excess or keep it, knowing when rates drop they will need more money?

Is there a reason savings bonds were not used as opposed to cash and savings accounts and CDs?


I don't mean to pick on your mother, my point was interest rate sensitivity is a risk which is easily planned for with some thought, regardless of what a person's risk tolerance is.

[Beppington]

I think the question in my mind is similar to: Does the stock market falling really matter?

I know people generally establish their financial goals with dollar sum targets, but if everything (stocks, MM/ CD/ savings acct rates, real estate values, etc) generally adjusts downward, does it really matter much? Many/ most people should be able to adjust their dollar targets accordingly ... I think. Shouldn't they?

If all those things I mentioned fall, but the prices of things keep rising, that would also "seem" bad, but if it's happening for everybody, while it may seem bad ... Is it actually? If the prices of things increases to the point where nobody can afford them, they eventually adjust downward. I guess its the time waiting for that adjustment that can be bad, or at least seem bad.

Seems to me the main people that should care about falling rates & values are those with no savings & no job, or worse, debt. At least folks with savings and/ or a job can make adjustments, sometimes undesirable adjustments, but adjustments nevertheless.

Maybe I'm just trying to make myself & everybody else feel better about the 1% & falling interest rates banks are paying in CD's & MM accts these days ... Nothing we can do about it anyway.

[jIM_Ohio]

I think the question in my mind is similar to: Does the stock market falling really matter?

I know people generally establish their financial goals with dollar sum targets, but if everything (stocks, MM/ CD/ savings acct rates, real estate values, etc) generally adjusts downward, does it really matter much? Many/ most people should be able to adjust their dollar targets accordingly ... I think. Shouldn't they?

If all those things I mentioned fall, but the prices of things keep rising, that would also "seem" bad, but if it's happening for everybody, while it may seem bad ... Is it actually? If the prices of things increases to the point where nobody can afford them, they eventually adjust downward. I guess its the time waiting for that adjustment that can be bad, or at least seem bad.

Seems to me the main people that should care about falling rates & values are those with no savings & no job, or worse, debt. At least folks with savings and/ or a job can make adjustments, sometimes undesirable adjustments, but adjustments nevertheless.

Maybe I'm just trying to make myself & everybody else feel better about the 1% & falling interest rates banks are paying in CD's & MM accts these days ... Nothing we can do about it anyway.

Not everything goes down.

Stocks, bonds and cash got hit, along with real estate in 2008 timeframe. But Gold and some other assets did OK.

In addition when you depend on your interest for living expenses, you have a bigger problem than interest rates... you have a money problem period.

For example when I get to point where I am living off my investments, its not the interest on the cash which I am spending- its the cash itself. There will be other assets generating new cash in
another pile" which I sell every 1-7 years to generate the cash I spend. I will not spend the interest I make one year the following year... the money I spend will be the cash which generated the interest.

[ken1706]

I found this interesting on the issue of low interest rates and how it affect savers and retirees. Savers in the UK have formed Save Our Savers organization to advocate government policies that don't punish savers. Seems like we need something similar here in the US.