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Seniors look for alternatives as average CD rate drops below 1%

As CD rates continue to wilt — the average dropped below 1 percent last week — calls roll into financial planning offices.

Where can retirees turn now that they can no longer depend on the popular financial instrument to pay bills, travel or make some extra pocket change? Certificates of deposit offered safety, security — and reasonable returns. No more.

"It's a huge hit," says Stephen Csenge, director of pro bono activities and a spokesman for the Financial Planning Association of Tampa Bay. "In our own business, we're getting multiple calls per week.

"They're anxiously looking for other alternatives, but there really are not a whole lot of alternatives."

Diving returns

The decrease in interest rates began in September 2006, when the national average for CDs stood at 4.53 percent and at 3.53 percent for all deposit products. Then came interest rate cuts to combat the global financial crisis.

Last week, an analysis by Market Rate Insight found that the average interest rate for CDs ranging from three months to five years dropped to 0.99 percent. Meanwhile, the national average for interest on CDs, money markets, savings and checking accounts stands at 0.80 percent.

Bob and Florence Deaton of Largo began moving away from CDs as interest rates began to drop. Professional financial planners have kept them ahead, but it has meant greater risk.

"I just don't believe in CD rates now," said Bob Deaton, who retired from Honeywell in 1985, when CDs were strong. "I remember when they were 18 percent in the '80s. At less than 1 percent, you might as well not put your money there."

The plummet has Darrell Williams, 70, of New Port Richey rethinking his decision to retire 12 years ago.

Williams thought he had a solid plan, storing money in CDs to maintain a more than comfortable living in his senior years. He and his wife have traveled abroad since his retirement, including to Scandinavia.

"We've pretty much traveled the world," he said. But loss of income from CDs has cut his travel to car trips.

His most recent jaunt?

"I drove back to West Virginia for my 50th reunion," he said.

Other approaches don't eliminate risk

Seniors generally have chosen CDs because they are safe. There is no risk of loss of principal when the deposit institution is federally insured, and a CD is a liquid asset, so there's easy access to money in an emergency.

Most of the alternatives carry risk that seniors often want to avoid.

"I think seniors need to be very careful," said Kimberly D. Overman, a Tampa certified financial planner and president of the Florida Financial Planning Association. "We've gone through periods like this before. It's never fun for anyone."

Overman says one alternative for seniors is to take a "ladder approach," with CDs broken in five or six chunks, which would allow for some longer-term investments with possibly higher interest rates.

Other alternatives include bonds or annuities. But investors risk loss of principal or face administrative fees, early-withdrawal fees or lengthy obligations that could be costly or too restrictive.

Government bonds, both U.S. and municipal, carry substantial risk. With U.S. government bonds, there's the risk of loss of principal, and because of budget troubles, municipalities often aren't fulfilling their obligations.

That matters especially for those depending on their investments to pay bills.

"We can't put that money at risk," said Michael Zmistowski, owner of Financial Planning Advisors in Tampa. "The No. 1 objection is going to be market risk or loss."

Promise in online savings accounts

Henry Kulig, a financial adviser with the Csenge Advisory Group, says Internet-savvy seniors also can find products with higher interest rates online with savings accounts at American Express, ING or Ally. While the interest rates pale in comparison to the 4 percent products in the past, they exceed the CD rates at as high as 1.29 percent.

"If they're savvy, they can get a better rate than their bank is offering," Kulig said. "I don't know anywhere else you can go."

The other risk — whether online or elsewhere — is fraudulent offers. The troubled economic conditions become a breeding ground for scam artists and their schemes.

"It's very ripe for fraud because the interest rates are so low," Stephen Csenge said.

To traveler Williams, the answer to the loss of income is simpler than finding an alternative investment strategy.

"Cut back," he said. "I'm by far not a rich man. I sympathize with anyone who hasn't had it as fortunate as I have. I still live comfortable. The problem is we're not able to do the kinds of things we were doing."

Ivan Penn can be reached at ipenn@sptimes.com or (727) 892-2332. Follow him on Twitter at www.twitter.com/ Consumers_Edge and find the Consumer's Edge on Facebook.

Factors to consider

With average CD interest rates dropping below 1 percent for the

first time, some senior investors are seeking alternatives. Here are some things investors should consider when looking at their options:

Riskier alternatives

U.S. government bond funds. Bonds have interest rate risk and investors risk loss of principal.

Municipal bonds. Because of trouble with local government budgets, municipalities are having problems fulfilling their bond obligations.

Variable annuities. Variable annuities may have substantial redemption fees and substantial penalties for withdrawals.

Safer alternatives

Online savings accounts. Because online companies do not have the overhead of banking centers and tellers, they can offer higher interest rates, though still under 2 percent. Among the companies offering the higher interest rates are American Express, ING and Ally.

Ladder approach to CDs. Rather than putting all your money in one CD, breaking funds into five or six different chunks with staggered maturity dates can allow for some longer-term products that will give higher interest rates.

Fixed annuities. Investors might have to commit to a five-year or longer period for their investments for interest rates at 2 to 3 percent.

Sources: Stephen Csenge of the Financial Planning Association of Tampa Bay and Kimberly D. Overman of the Florida Financial Planning Association

Seniors look for alternatives as average CD rate drops below 1% 11/13/10 [Last modified: Saturday, November 13, 2010 10:16am]

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