As interest rates rise, retirees cheer
Many investors would benefit from another Fed rate hike Wednesday.
When banks offered to pay 1 to 2 percent interest for a certificate of deposit two years ago, Charles Van Stone felt insulted, even angry.
But now, after the Federal Reserve has hiked interest rates 15 consecutive times, the retiree recently found a Virginia bank that would pay him more than 5 percent. "It gives me some dignity," says the Shepherdstown, W.Va., former government employee.
Wednesday, when the Federal Reserve is expected to raise interest rates for the 16th consecutive time, at least one group will be cheering: retirees like Mr. Van Stone and other conservative investors. They remember the 1990s, when some CDs paid as much as 7 percent, and they're ready to leave behind the rates of two years ago, when many had to eat into their principal to meet expenses. Now, for the nation's 35 million seniors - many with some type of investments - the interest rates on their CDs and savings accounts are much better as the nation's mentality begins a subtle shift from consumption to savings.
"For most of our members, rising interest rates are a good thing," says Clare Hushbeck, an economist at AARP. "Aside from earning more interest on their savings, they are finished making interest-sensitive purchases such as automobiles or houses."
Still, recent economic data have sent mixed signals. On Friday, the Labor Department reported the economy created 138,000 jobs in April, well below the prior months, when it was producing 200,000 jobs or more. Economists aren't certain if the lower jobs number means the economy is finally slowing down or if it's a temporary phenomenon. Wall Street interpreted the numbers as indicating the Fed might be finished raising interest rates, and stock prices roared on Friday, with the Dow Jones Industrial Average climbing 138.88 points. Monday morning, the rally continued, but in a more modest fashion.
A stock market rally can be good for many kinds of investors - including retirees. According to the 2004 Federal Reserve Survey of Consumer Finances, 46 percent of heads of household who are ages 65 to 74 hold stock either directly or indirectly, such as through mutual funds. And 35 percent age 75 or older own stock directly or indirectly.
But for the most part, retirees are more conservative with their investments. "Most seniors are interested in minimizing risk versus maximizing their returns," says Tim Smith, a certified public accountant in Queensbury, N.Y.