Help for Savers in This Low Interest Rate Environment - Commentary from Dave Ramsey and Other "Experts"

The New York Times has a section called "room for debate" where leading experts discuss hot topics. A reader pointed out in the forum a recent "room for debate" hot topic, The Sorry Lot of the Risk-Averse Saver. The introduction describes the problems that savers have in today's ultra-low interest rate environment:

They either lose ground, because interest rate returns are low while food and energy costs are going up, or they have to consider making investments that are relatively risky and require longer term commitment.

Acknowledging The Problem

There are six debaters who provide commentary. Two just basically acknowledge the problem. One concludes the first step is for the country to acknowledge this problem:

It will be hard to solve the savings crisis, but we have to acknowledge its existence -- something we have barely begun to do.

Several of the Fed's Regional Bank Presidents have acknowledged this in speeches. Here's what Richard Fisher has recently said:

Americans who have done everything right, have worked hard, saved their money and stayed out of debt are the ones being punished by low interest rates,

In all the speeches and interviews from Bernanke that I've seen, I can't remember when he acknowledged this problem. Perhaps when Bernanke gives his first press conference after the next FOMC meeting, a reporter can ask for this simple acknowledgement.

Recommendations for the Government

Two commentaries provide recommendations about what the government can do to help. An economist proposes a new type of retirement account that "that guarantees a reasonable rate of return and is backed by a professionally managed diverse portfolio." This seems like a reasonable proposal if long-term investing in well-diversified stocks and bonds is such a sure thing as many financial "experts" suggest. The economist's tongue-in-cheek recommendation is interesting:

Federal Reserve employees have a very well-run defined benefit pension plan and could guarantee elderly savers something like a 3 percent return.

Since the Federal Reserve policies take from retirees, the least it could do is manage the accounts of millions of retirees who are suffering simply because of their good intentions to save for a modest, safe and secure retirement.

The other commentary encourages the government to ensure the programs that target retirees and are intended to serve as a safety net be kept intact:

How can the government respond? For the group disproportionately suffering from low interest rates, this is not a time to cut Social Security payments, and we should consider at least a temporary subsidy to offset rising Medicare premiums.

I'm surprised no one suggested tax policy changes to help savers and retirees. Last year I proposed two tax policy changes that could help savers and retirees without significant impact to tax revenue. One good suggestion that a reader provided in the comments of that post is for the Treasury to increase the annual purchase limit on savings bonds to what they were before 2008. In December 2007, the Treasury announced a dramatic reduction of the annual purchase limit for savings bonds. Before 2008, the maximum annual limit for I Bonds was $60K ($30K electronic and $30K paper). This was reduced to only $10K in 2008.

Recommendations for Savers

Two commentaries had recommendations for savers. As you might have expected, Dave Ramsey recommended the stock market:

if you are going to leave your money alone for five years or more, the best place to invest is in good growth stock-type mutual funds that have a long track record of good returns.

The other commentary was more interesting. The economist Garett Jones gave the following recommendation:

Three ways to make the best of this new low interest world are to invest in municipal bonds, match your stock portfolio to your career portfolio, and buy investments that can be durable and make you happy.

Last year a reader provided a guest post, What Your Broker Won’t Tell You about Municipal Bonds. In the post he shared his many years of experience buying and selling municipal bonds. These can be a good alternative to CDs, but unlike federally insured CDs, there is a risk of loss when investing in municipal bonds.

Municipal bond funds also have a risk of loss especially when interest rates rise. However, this risk goes down for funds that invest in shorter maturities. Fidelity Short-Intermediate Municipal Income Fund has a 30-day yield of 1.73% with a tax equivalent yield of 2.66% (as of 4/12/2011). Vanguard Limited-Term Tax-Exempt Fund has a SEC yield of 1.38% (as of 4/12/2011). These yields are a lot higher than money market fund yields. Also, they are higher than bank savings account rates, especially when you consider the tax equivalent yields.

Bottom Line

Unfortunately, as the "room for debate" introduction described, savers have two basic options:

They either lose ground, because interest rate returns are low while food and energy costs are going up, or they have to consider making investments that are relatively risky and require longer term commitment.

However, savers can take many steps to significantly improve option one. The higher the interest rate you can get from your bank or credit union, the less ground you're losing. I have several tips for maximizing your bank interest in my post Strategy for Getting the Best Yields in Deposit Accounts. And of course, you can use DepositAccounts.com to find the best rates.