There was a time, in days of old, when people could deposit money in a bank and earn interest on it. Yes, I know that’s hard to believe. So here are some real believe-it-or-not facts:
- The last time anyone earned 6 percent on a 6-month certificate of deposit was December 2000.
- The lowest yield on 6-month CDs immediately after the Internet crash was 1.01 percent in June 2003.
- The highest yield on a 6-month CD since June 2003 was 5.22 percent in July 2006.
- Today, the highest yield 6-month CD in the entire country is 1.10 percent. That's according to Bankrate.com. But the vast majority of banks offer less than 0.15 percent.
Here's some perspective on the yield famine. Let’s consider how much money in savings a Solvent Senior would need to have in 6-month CDs to pay a few typical bills.
- If you enrolled in Medicare Part B this year, your monthly premium is $121.80 or $1,461.60 a year. To earn that much in interest on a 0.15 percent CD you’d need $974,400 on deposit. Most people come up short. But don’t worry— Social Security deducts the premium from your benefit check.
- The official Federal Poverty Level income for a family of two this year is $15,930.To get that from risk-free savings earning 0.15 percent you would need $10,620,000. According to my most recent Wealth Scoreboard, you’d be in the top 1 percent of all wealth holders age 60-69 with $11,657,000. So to live in poverty you need to be flat out rich if you’re trying to do it on safe savings.
I could go on, but you get the idea: we are in a desolate yield famine. Worse, there is no sign it will end anytime soon. The yield famine has survived four presidential terms of office. Republicans and Democrats split the years. So it’s pretty clear that those who represent us don’t care what this is doing to retirements.
We’re on our own. We need to find our own ways to cope. Here are a few:
Pay off debt.
Yes, I know that’s obvious. But millions still believe that their home mortgage is a vital source of healthy tax deductions. Paying off an older mortgage can make an enormous difference in your income needs. For example, suppose you still have seven years to pay on a 4 percent interest mortgage. Your monthly payment on every $1,000 is $13.67 or $164 a year. Pay off the mortgage and you end paying $40 of interest per thousand owed. But you also end the need to pay back principal.
Buy in bulk.
There are practical limits to this. But anything with shelf life that you can buy in quantity will deliver a bigger discount than you’ll earn in years of saving. It will also protect you from inflation.
This seems unreasonable when regular gas goes for $1.50 a gallon instead of $4, but here’s the deal. There are lots of hybrids out there. They now sell at discounts instead of premiums, new or used, so the numbers work well. Example: trade a 20-mpg car that runs on premium gasoline (often 50 cents over regular) for a 40-mpg car that runs on regular. Savings on 10,000 miles: 250 gallons. Savings in cash: $625 a year, and likely to rise.
Small potatoes, you say? Just consider what you need in savings to deliver $625 a year. You’d need $18,382 in a stock with a four percent yield, before paying 15 percent in taxes, to deliver that amount of cash. You’d need more if getting that $625 put you at a level where your Social Security benefits became subject to the income tax.
Spend with care.
Don't suffer from autopilot spending— having regular monthly bills that are never examined. The biggie here is typical cable TV versus going a la carte with Internet access, Netflix and/or Amazon Prime. For this and everything else, if you don’t get your money’s worth, cut it.
Is this difficult to do? You bet. It requires attention. But in case you haven’t noticed, Solvent Seniors don’t have any friends.