Most economists have seen low interest rates as a primary cause of the economic recovery that Americans have seen over the past several years, with cheap financing making it easier for debt-ridden consumers to make ends meet while being able to make key purchases like buying homes and cars. For retirees, however, low rates have been devastating to their standard of living, with income from bank CDs and other conservative investments essentially drying up. This week's decision from the Federal Reserve not to move on interest rates only extended the pain that millions of retirees are dealing with, but smart investors have already figured out that there are steps they can take to overcome a Fed that seems hell-bent on refusing to give them a break by boosting the rates on their traditional sources of retirement income. Let's take a look at three of them.
1. Adding dividend stocks to your portfolio has a dual benefit.
Many desperate retirees have necessarily become more aggressive in their investing, choosing to move away from fixed-income investments like bank accounts and bonds because of their low rates and instead replacing them with dividend-paying stocks. Most investors fully understand that moving money into the stock market carries plenty of risk, but the higher yields that many dividend stocks pay make the look preferable to traditional fixed-income investments.
To the extent that such a move makes retirees take too much risk with their investments, the shift toward dividend stocks could be an unfortunate consequence of the Fed's reluctance to act. Yet many retirees are actually too conservative with their portfolios, not taking into consideration the need to ensure that your money can grow over time to cover a retirement that can last for decades. As a result, moving to dividend stocks might well have been the best move at a difficult time for those who had previously relied only on bonds and bank accounts.
2. Shopping for better rates can be worth the hassle.
For short-term expenses that retirees expect within the next year or two, though, stock investments don't give them a long enough time horizon to weather a potential downturn before they need cash. Therefore, most retirees can't afford to give up on fixed-income investments entirely, despite the Fed's reluctance to pay higher rates.
One thing that many savers have realized is that they can often get a better deal on their savings by shopping around at various financial institutions. While major money-center banks typically pay rock-bottom rates of 0.01% or so on savings, other lower-margin banks are willing to pay 1% or more on a completely liquid savings account. Similarly, many banks pay next to nothing on certificates of deposit, but at other institutions, CD rates in the 1% to 2.5% range are attainable if you're willing to lock up your money for a long-enough period of time.
Admittedly, getting an extra percentage point in interest might not sound like a big payoff. But if you have enough set aside, even fractions of a percent can add up to real money over a period of years, making it worth the upfront effort.
3. Clamping down on investing costs will give you better returns.
Many investors haven't paid much attention to the fees and expenses they pay on their investments in the past, with favorable returns largely hiding how much money gets lost to the financial institutions managing their money. Yet when returns start to dry up, it's far more evident who the lowest-cost providers are compared to those charging much higher fees.
With fixed-income investments in particular, it can be difficult for seasoned investors to produce enough extra return from their strategies to outweigh the impact of a high expense ratio. Annual expenses of 1% or less might not sound like that much, but when a 10-year Treasury yields less than 2.25%, taking a percentage point off the top amounts to losing more than 40% of your gross income to fees. By contrast, if you can find ways to save those costs, it can be worth it even if it means accepting an investment with a smaller nominal interest rate.
The Fed hasn't been kind to retirees lately, but that doesn't mean you're powerless to resist. By taking these steps, you can thwart the reluctant Fed and take valuable steps to protect yourself from the challenges that low interest rates have forced retirees to deal with for years.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.