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Based on yesterday's Fed statement that "economic conditions [...] are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013", those who depend on interest from their savings are faced with some tough choices. It's likely that CD rates will stay low for a long time. The low CD rates may force seniors into going back to work to make up for the loss of income. In my yesterday's FOMC post, the reader Mary Grace commented about the situation of her neighbor:
My 86-year old neighbor just went back to work, believe it or not Burger King hired her, 22 hours a week to wipe tables and fill the napkin dispensers, etc. She used to be a teacher in a private school but of course can't do that any longer. Never married. She went back to work because she gets very little soc. security, no pension. She has $425,000 in CD's (I know because I help her with her affairs) but now they throw off very little interest, maybe $1,000/month, taxable. Not enough for her to live on with medicine, heat for her home, etc. If she could get 5% again, she could enjoy her retirement and not wipe after teenagers at the Burger King. This country is very messed up right now. She can't understand why all her scrimping and saving still wasn't enough.
The reader doubleR provided some useful suggestions for Mary's neighbor:
To Mary Grace: Based on her advanced age, your neighbor should consider a single life immediate fixed annuity for at least a portion of her savings. The downside is that it removes that amount of savings she could leave to a loved one when she dies but at her advanced age if she took half her savings, say $200,000, she could probably get about $2,600 per month from the annuity. Or if she was willing to use $300,000 for annuities, she could probably get about $3,900 per month. That would still leave her a reasonable amount of savings. But she should probably not put more than $100,000 with any one insurer to spread the risk and stay under the protection provided by most states in case an insurance company where to go belly up. She deserves to use that money for her own enjoyment rather than leaving it to someone else when she dies since she worked so hard to scrimp and save it. Otherwise some banker is enjoying the fruits of her savings instead of her.
The suggestions of doubleR make sense. Here's what Clark Howard says about immediate fixed annuities:
Most annuities have massive commissions and massive expenses. That's why they're pushed by commissioned salespeople, especially those in banks who target customers complaining about low CD interest rates.
But there's one annuity that may be a great deal for a lot of people. It's called an immediate payout annuity (aka life annuity).
As doubleR describes, one downside of an immediate fixed annuity is that there will be less for your heirs if you die early. As Clark describes, you can choose policies with guaranteed payouts but the tradeoff is that your monthly benefit will be reduced. Another downside is that your money is locked into the annuity. Unlike most CDs, annuities may not have early withdrawal options if some emergency arises. That's one reason not to put all of your savings into an immediate annuity.
You can see how much income you can get with immediate fixed annuities at www.immediateannuities.com. I plugged in an age of 86 for a Florida female with a dollar amount to invest of $100,000. The largest estimated monthly income returned was $1,293/month ($15,516/year). This was a single life income with no payments to beneficiaries. If you want something to be left to beneficiaries, there are options with smaller monthly income payments. One example was a single life income with up to 10 years paid to beneficiaries. This had an estimated monthly income of $849/month ($10,188).
How can an immediate annuity pay over $15K per year on a $100K policy? The older you are, the higher the monthly income. This is because the insurance company will keep all or a significant portion of the investment when you die. If you plug in the age of 66 instead of 86, the top monthly income goes down to $603/month ($7,236/year).
The other reason why the immediate annuity income can be so much higher than CD interest is that the income includes some principal.
One thing to remember is that like CD rates, the monthly income from immediate annuities is dependent on the interest rate environment. Today is not the best time to lock into immediate annuities. The monthly income payments will increase when rates rise. But if you are up in age and need money in the next 10 years, you have less time to wait for higher rates which could take several years.
It is not for everyone who needs income, because if in poor health, you are actually gifting the insurance company with your life savings should you die shortly after purchasing such annuity, For every security option chosen from above, your monthly income is lowered proportionally and if COLA chosen, you will receive 1/2 of the money for the next 10 years or until you catch up with the inflation rate.
It is not easy decision and nobody should purchase SPIA unless consulted the immediate family members, CPA, existing estate of record and the mind of the person purchasing the annuity, because there is no reversal and nobody can revoke the deal once signed.
I will admit, I don't fully understand these things. Yet, is it really a better situation to hand your money over to some company that might go bankrupt but give you $15,000 a year if they don't, rather than merely withdraw
$15,000 a year from your $100,000? The withdrawal route would get you about 7 years if you got no interest on it at the bank, but with the interest, you would have to expect at least 8 years. That gets you to age 94. Some people live beyond that - but only very few. Only if you lived beyond that would you get more from the annuity than you would by just leaving the money in the bank. And the bank is FDIC insured, and your money would remain available to you as needed in the meantime. I don't see how these annuities are a benefit. In fact, I'll bet there are all kinds of details to consider -- for instance, do you (your estate) get back the principal if you die, like you do in a bank account?
PS
People holding large sums can, with a bit of planning and discipline, effectively build their own annuity.
Annuities are extremely profitable for insurers. Boomers totally freaked out over Mr. Market these days should consider a CD ladder, even with these pathetic rates.
As a private school teacher living on her own with only one income, she probably didn't save that much money. It sounds like she retired based off the expectation of the market always going up, CD rates always being high, or something like that. I'm not trying to be rude, but it sounds like the non5% rate is being blamed. The country might be f*ed up now, but that's only because it's been f*ed up in OUR FAVOR for so long. She is choosing to go back to work, but it is a choice. I neither have animosity nor sympathy for her. My sympathy is for the 2009 still unemployed graduates who will be left behind for decades due to irresponsible government and bad timing (of being born) on their parts.
I applaud the comments by CPA commenter #10. I am not a CPA but she is right on the mark!!!!
Given this lady, at her age, is able to put in 22 hours of work each week, we have to assume her health remains decent. This offers some indication she will enjoy a long life . . uh . . an even longer life I should say. She should work for as long as she wants to and is able, then spend down her nestegg without hesitation. She should not, in these terrible times and given her circumstances, be worrying about the next generation (family, I mean, if she has any family members). They, if any exist, certainly don't appear to be worrying about her.
Finally, this story presents a great opportunity to give a shout out to Ben S. Bernanke:
Thanks, Ben, for taking such good care of this lady and America with your asinine and outrageous policies.
BTW, Ben, we all know the "S." stands for "skunk"!
As to the safety net(s) referred to by #9, it (they) exist - but good luck trying to fall safely into them. I do volunteer work helping seniors find resources when they have run out of money and see firsthand that the safety net ia full of holes and exists largely in name only. It requires stamina and the stomach to persevere through the roadblocks, the calls not returned and the incredibly complex guidelines - at a time when the senior's faculties are waning, and their health is deteriorating.
I applaud the lady's courage and commitment to providing for herself for as long as possible.
However, we should all remember that the problem that this woman faces is analytically identical to the problem that EVERY conservative saver faces. It's tempting to have more sympathy for her (because of her age, and the fact that she needs the interest income now), however the reality is that we all are watching our savings stagnate -- while the cost of living continues to rise (and the US dollar declines).
A lethal combination of taxes and low real interest rates have penalized savers in the USA for the past 40 years. At the same time, government policies rewarded people who borrowed money and acted irresponsibly.
There's nothing that can fix this woman's problem today. However, the long-term solution for this woman (and all of us) is:
1) Stop the government's irresponsible and unsustainable deficit spending policies.
2) Fix the tax code and impose a flat income tax rate (and perhaps a VAT tax) that encourages savings, investment and capital formation. That will eventually create jobs and growth.
3) Change the Fed's dual mandate. They should have one job only: To target a stable inflation rate and stable US dollar. They should not be playing games with QE1...QE1000 ... or making promises about future interest rates. The dollar is at an all-time low against the Swiss Franc, the Yen, the Canadian Dollar etc etc ... and that's tantamount to a declining standard of living for all Americans.
Ultimately, we'll all be much worse off than that woman when we retire -- unless these sorts of critical structural changes are made....
No to a VAT tax. The left would love that. We would never know the the tax that is built into a product. I want to know exactly what the tax is. We don't want to be more like Europe.
Maybe a flat tax or a national sales tax. With the sales tax everyone not paying now would have to contribute. That includes criminals.
The interest rates offered are only AFTER all fees, commissions, etc. are taken, so one receives on maturity the exact amount calculated at time of buying it. At least that has been my experience during the years I've been buying them. It's simple and it pays more than bank CDs for the years one chooses. The only thing one must be careful with is the rating of the insurance company that sells them. Also, you can take out the interest if needed without penalty.
While I was one of the fortunate persons to get 6% at Penfed IRAs, it'll mature in 3 months and to have to go for 10 years with a two something percent at a bank CD is too bitter a taste! lol! A 10-year annuity may give you 4% at this stage of the national game, although shopping around, just as with bank CDs, may do better.
I have at present (and had in the past most satisfactorily) annuities with Jackson National Life Ins. Co. of NY (sold thru some private agency in Florida), if anyone is interested. I have two 8 or 10-year annuities at 5.66%. Another one with ING (sold thru "Reliastar Life Ins. Co. of NY") for 5 years at 5.05%, a lower rate because I bought it recently when things are so down...No fees or whatever.
I think these make a great interim investment until our national situation comes back to normal don't you think? :)
I also care for my bedridden elderly mother at home, with another family member. It's great if you can do it, but there are circumstances where it is impossible due to the person's catastrophic problems, unless you employ 2 24/7 nurses.