Senior savers will wait to reap benefits from Fed rate increases

(Bloomberg) — Jerry Willis is ready for higher interest rates.

Willis is 79 and retired. Like millions of other older Americans, he owns an investment portfolio that includes a bank savings account and certificates of deposit, for which returns have withered since the Federal Reserve cut rates to near zero in 2008. Willis, who lives in Alexandria, Via., has already taken advantage of one of the biggest benefits of easy money by refinancing.

“We aren’t getting as much interest,” he said, while out strolling in Alexandria’s historic Old Town shopping district. “At this stage, I’m not going to refinance anything else.”

After years of enduring meager returns on low-risk investments, retirees can look forward to more money in their pockets after the Fed starts raising interest rates, though the benefits won’t flow swiftly. The Fed, which has drawn political ire for policies that critics say penalized savers, says it expects to only raise rates gradually.

Fed Chair Janet Yellen and other officials have acknowledged that the easy monetary stance has cost savers who keep their money in low-risk investments such as CDs and money market funds, while countering that it’s also allowed economic healing that’s benefited everyone.

Still, when the Fed raises rates — a move about half of economists expect this month — it could begin to diffuse an issue that has made the central bank an easy target for critics in Congress, while providing welcome relief.

‘Very hard’

“It has been very hard on retirees, because it is impossible to get any income out of safe assets,” said Alicia Munnell, director of the Center for Retirement Research at Boston College and a former Boston Fed researcher. “There’s no argument for moving very far, very fast on a policy ground, so I think people are going to be disappointed on the money-using side with how little rates increase once the Fed starts moving.”

Fed policy makers cut the benchmark federal funds rate to near zero in December 2008 to prop up the economy in the face of the worst recession since the Great Depression. Now, as the U.S. job market heals and moderate growth persists, they are considering lifting rates above that emergency level. About half of economists in a Bloomberg Survey expect an initial quarter percentage point rate rise at the Sept. 16-17 Federal Open Market Committee meeting.

Theoretically, that move should be a boon to seniors. Households headed by someone older than 75 lost out on about $2,700 of income annually because of lower interest rates, based on a McKinsey Global Institute analysis from 2013. The study compared 2012 rates to 2007 rates while holding constant assets, which included pension plans and life insurance. By contrast, households between the ages of 35 and 44 are net debtors, and had $1,700 more to spend each year because of the Fed’s zero-rate policy.

“Many retirees — and I hear from some almost every day — are really suffering from low rates that they had anticipated would bolster their retirement income,” Yellen said in a June 17 press conference. “Obviously there are benefits from a strong economy to every household in the economy, including savers, from having a better job market and a more secure economy. But, yes, when the time comes for us to raise rates, I think there will be some benefits that flow through to savers.”