"I put my money in a CD!"
What was once a savvy comment by seniors keen to avoid risk and still earn a decent return now sounds like a punch line to a bad joke.
The certificate of deposit — federally insured, easy to understand and easy to invest in — is now about as popular as a root canal.
Ever since the Federal Reserve started aggressively driving down interest rates to try to stimulate the economy, CD rates have turned microscopic.
This is not a new trend. Ultra-low CD rates arrived as a byproduct of the recession.
But one result has been a painful multiyear decline in the living standards of those retirees who historically rely on CDs as a low-risk way to earn interest income — money they rely on in their daily budgets. With rates now routinely below 1 percent on CDs — and with lower-risk alternatives like Treasurys and bonds also offering low returns — many conservative investors have been forced to put more of their money in higher-risk investments.
After taxes and inflation, CD investments in effect are money losers and probably will remain so for the next few years.
Consider these puny rates: At local Bank of America branches, a standard 12-month CD, whether it is an investment of $50 or more than $500,000, comes with a pathetic interest rate of 0.03 percent. The national average on a 1-year CD is a paltry 0.23 percent.
You could probably find better returns looking for loose change under your sofa cushions.
A longer-term CD isn't going to help much. B of A's 10-year CD, a long time to commit to any investment, comes with a paltry interest rate of 0.15 percent. If you left any sum today in such a CD at that rate, you would end up 10 years later with a sum worth less than when you started, given the effects of taxes and inflation.
A standard CD requires investors to wait for the certificate to mature or face a penalty for early withdrawal.
Rates are insultingly low for several reasons. The Fed is purposely keeping rates in check to encourage cheap borrowing and, hopefully, more spending to boost the economy and add more jobs. Banks use money from CDs and other savings to make loans. With demand for loans still weak from wary consumers and businesses, banks have no incentives to offer higher CD rates.
Until that vicious cycle changes, many seniors will scramble for alternatives to undernourished CD rates, or keep trimming their lifestyles.
Robert Trigaux can be reached at email@example.com.