Lower yields hitting income of retirees

Virginia Maxwell and Jacquie Council are arguing as they spend the early morning walking the perimeter of a suburban Maryland mall.

"They keep dropping the interest rates," says Maxwell, 79, who retired from the Department of the Navy in 1978. "I need that interest to live."

Council, 56, sweating slightly as she pauses among the roughly 150 seniors who regularly gather at the mall to exercise, looks at it differently. "I've got loans, woman. We're seniors. After everything we've given, we deserve lower rates."

It's coffee, kvetching and capitalism, all before 9 o'clock in the morning.

And their dialogue reflects the downside and upside for millions of Americans as interest rates keep falling. When the Federal Reserve lowered a key interest rate last week to its lowest level in more than four decades, many other rates followed.

That means less interest income for savers who put their cash into certificates of deposit, money-market accounts and money-market mutual funds. But it also means easier terms for many borrowers, including those with home-equity lines of credit or those seeking car loans or many business loans.

When John Polimeno, 72, retired 12 years ago after a heart attack, he thought he was prepared. He took half his retirement annuity as a lump sum of about $30,000 and put a portion in a low-risk money-market fund and a portion in the bank. The remainder of his annuity and the interest from his investments, he expected, would provide for him and his wife in Reading, Mass.

For the first 10 years, amid a booming economy and higher interest rates, things were great. But, in 2000, his wife started having serious health problems.

'It's pretty hard'

Then in 2001, the economy soured and the Fed started cutting rates to spur growth. Polimeno's investments were tied to interest rates, and his income began to decline.

"At one time we were able to live off our interest, but now it's impossible," said Polimeno, who said he supports himself and his wife on about $25,000 per year. Five years ago, his income was 10 to 20 percent higher, he said. "We used to go out to lunch once every two weeks, but that doesn't happen anymore. We used to purchase new clothes. Not anymore. We're not eating cat food yet, far from it, but it's pretty hard."

Polimeno is among many retirees who are struggling now because they followed the common advice to play it safe by putting their money into interest-bearing saving instruments, said John Rother, policy director for AARP, formerly the American Association of Retired Persons. "People who did the right thing are now finding that everything's changed."

Retirees on fixed incomes are among the hardest hit by soaring health care costs, which have been rising well above the overall pace of inflation for years.

"The major uncontrollable expense for most seniors is health care," Rother said.

Polimeno said he spends more than $2,100 a year for his wife's prescription drugs. As long as his medical costs rise faster than his income, he's in a downward spiral.

"If you had asked me 10 years ago, I would have said we're not going to have a problem," Polimeno said. "Now, I have no idea how I'm going to do this five years from now."

Two years ago the Society of Actuaries determined that 55 percent of male retirees underestimated the average life span of a 65-year-old American male. It is 81 to 83 years. When benefits "are paid as a lump sum," the report notes, "estimating life expectancy is a major consideration in protecting against outliving one's assets."

"Lowering interest rates hasn't helped me at all," Polimeno said. "We're just slowly going backwards."

But more can borrow

For others, though, low rates have made new lives possible.

In 1999, after eight years as a computer programmer, Dee Kreidel, 31, started her own company selling hand-carved items. But interest rates were higher then, too high for her to borrow to advertise, she said.

"I didn't have the money to market," explained Kreidel, who closed the business in 2001.

But last June, right before the birth of her third child, the single mom decided to try again, starting Daxdevelopment.com in Pleasantville, Iowa, to produce e-commerce products. Earlier this year, after seven months of 20-hour days, she decided it was time to try for a loan.

"With interest rates being so low I was like, 'Oh yeah, I gotta do this now,'" she said. She got a $50,000 loan at 9 percent and used the money to hire three employees.

Since then, her business has grown by about 200 percent, she said.

But the biggest change has been personal rather than financial.

"I used to feel incredibly guilty if I took any time away from work," Kreidel said. "Guilty for not spending time with my business and not spending time with my kids."

Her children "understood this was paying for everything, but they were bitter because they never saw their mom. They would come down and talk to the side of my head while I was at the computer."

Now, with employees, Kreidel can take weekends off. Her children "get me two nights a week to just be with them, the TV off, just me and them."

Record-low interest rates have made it possible for new groups of people to receive loans, said Oscar Dominguez, a vice president and branch manager at Union Bank of California in Thousand Oaks. Minorities and women in particular are suddenly finding banks competing for their business.

"The people coming in for loans now were traditionally excluded," Dominguez said. "It's inspiring."

One of Dominguez's clients is Susie Glennan, 39, who purchased TheBusyWoman.com four years ago by maxing out her credit cards at an interest rate of 14.9 percent.

Glennan said she was turned down for loans three times in her first year and was paying $5,000 to $10,000 per year in interest. Now, though, "all the banks are begging us for business," she said.

Similarly, Kreidel finds this business experience completely different from her first.

"Now, lower rates make it possible to grow my business and my children."

Some diversified

Other investors are relatively indifferent to changes in interest rates.

Wade Roberts, 58, retired a year and a half ago as a vice president of United Technologies Corp. and put his financial future in the hands of Stephan Cassaday, a certified financial planner.

"As the interest rate started falling we really didn't have to do anything except manage the portfolio," Roberts said from his home in Alexandria, Va. "It's designed so that changes in the market won't affect me much. I don't see how retirees who don't have a good financial manager can do it."

Roberts, like many retirees who rely on financial professionals, doesn't see his fortunes rise or fall much when interest rates change, explains Cassaday.

"The key is diversification," said Cassaday, of Cassaday & Co. in McLean, Va. "There are two risks for retirees. First, the most common, is that investors are too aggressive and blow their portfolio up. But there's another risk that most people are not aware of. The risk of being too conservative and having the misfortune of living longer than your money lasts."

But there are risks associated with any investment that isn't insured by the federal government.

"Investors can't have both perfect security and high returns," Cassaday said. "If you tell me you never want a 12-month period when your stocks go down, I'll say fine. But your returns will be 2 to 2.5 percent before taxes."