CD Rates Take the Gold Out of Golden Years

It's said that you can only count on two things in life -- death and taxes. Investment professionals might want to add a third item to that list: low interest rates on CDs, at least until the middle of 2013. Consumers on fixed incomes, particularly retirees, need new strategies for coming out ahead in the current financial environment. Here to offer advice on minimizing risk while trying to get the best available interest rates is Frances C. Lawrence, Ph.D., professor of finance at Louisiana State University.

The Federal Reserve has pledged to keep interest rates on hold until mid-2013. What should senior citizens and others living on a fixed income do amid low CD rates? How can they cope with low savings yields without taking on too much investment risk?

The fact that interest rates have dropped to historically record lows is hard on senior citizens, especially for those who have very limited resources and rely on Social Security, a small or no retirement income and on interest from their CDs or money market mutual funds to pay for basic everyday expenses. These seniors likely chose to invest in a CD or other short-term savings and investment products because of their low risk tolerance, which is advisable as one ages and there is less time available to recoup from a loss. With the current state of the market, seniors have to ask themselves if they will be comfortable with taking the risk for a potential higher gain and if they are willing to lose a portion of their principal, even if it is a small amount. In many cases, for those who have very limited resources, the likely answer is "No."

To cope with their current situation and avoid taking on any additional risk, one option for seniors is to comparison shop for their securities -- CDs, money market mutual funds and other bank deposit accounts. Yes, the yields will be low, but one can still identify the highest of the low. When buying CDs, ladder them -- buy different maturities -- so that when the rates rise, and that could happen rapidly, one will have some money available to take advantage of the higher rates. Until that happens, it may be necessary for some seniors to use some of their principal.

Whatever you do, don't make the mistake of reaching for the yield. Also, remember that it's not necessarily how much you make but how much you spend. With low yields, now is the time to use every wise consumer tip you know and learn some new ones to spend less.

We would like to thank Frances C. Lawrence, Ph.D., Gerald Cire and Lena Grand Alumni professor, CFP board-registered program director / editor, Journal of Financial Counseling and Planning, Louisiana State University E. J. Ourso College of Business, Department of Finance. Greg McBride, CFA and senior financial analyst for, contributed the question for this interview.