Will recent rate cuts designed to fuel the U.S. economy stall the retirement income plans that advisors have helped their clients put in place?
While advisors contacted agree that the new rates paid on certain savings vehicles, such as certificates of deposit, money markets and savings accounts, can create a challenge, they also offered their advice on what responses might help alleviate the impact of lower rates.
The Federal Reserve Board cut its federal funds rate, the overnight bank lending rate, to 2.25% on March 18.
A spot check of rates that a couple of banks were offering on March 24 found the following annual percentage yields:
–Passbook and statement savings account ranging from .25%-.40%
–3-month CDs ranging from 1.5%-2.5%
–1-year CDs ranging from 2.25%-3%
–5-year CDs ranging from 2.5%-3.75%
–Money market accounts ranging from .35%-3.25%, depending on terms.
“Our bottom line is to match risk profile with needs in retirement. The risk profile is most important,” says Anthony Benante, a wealth management principal with Baron Financial Group, Fair Lawn, N.J. about his firm’s philosophy.
If a client’s risk profile is very conservative, then his firm helps the client understand that returns will also be lower, he says. For such clients, there are a number of ways to deal with lower rates on their savings vehicles. Benante says the first thing to look at is belt-tightening, but a discussion about returning to work part-time may also be necessary. It is a discussion that most people do not want to have, he continues.
“There is a difference between driving less and seeing fewer movies and not being able to make ends meet. If you’ve tightened your belt to the last notch, and you can’t make it, then you might need to consider going back to work.”
Nearly all the portfolios of his firm’s clients have some growth component in them that has helped them stay ahead of inflation and up with taxes, he says.
Benante also says his firm tries to have clients maintain a year’s worth of living expenses, funds that are drawn from other diversified investments in the portfolio that are performing well.