Since 2007 when the economic crisis really took hold, the news has been fairly grim for those of use looking to maximize our savings. In 2007, short-term interest rates were at 4.5% on CDs, and today that rate has dropped below 1%. So for CD owners, a group that is predominantly seniors, have taken what amounts to a 75% hit on a big portion of their retirement income. What’s particularly frustrating about this phenomenon is that it punishes the very people who were being safe and conservative with their money. These are not people who were risking their money in some high-risk stock investment or Ponzi scheme; they had their money in a bank!
So what are the options today for those retirees who have been forced to deal with a drop in their investment income? Some are turning to credit unions (as non-profits, they tend to offer slightly higher rates than banks), and some are looking at bonds, but it is important to proceed cautiously with bonds, focusing primarily on short-term high-quality options. Because when interest rates rise, bonds are going to get hit. Keep in mind, you are not looking to get rich here, you are just looking for a slightly higher yield. If you decided to roll over or cash a CD, try to avoid getting sucked into an investment (a common bank sales strategy these days) without adequate research. Another option is to go into dividend-paying stocks. The problem with that is that dividends are not guaranteed, and when the economy takes a turn for the worse, many companies are likely to cut their dividends. Additionally, dividends are not “bear proof”: a bear market puts your principal at risk. Another word of caution on dividends: the latest budget proposal from the White House proposes raising tax rates on dividends significantly. If this comes to pass, the current dividend tax rate of 15% will climb as high as 39.6%, and even higher when you phase out deductions and exemptions and factor in the 3.8% investment tax surcharge for the health care plan slated to come online in 2013. Historically, when tax rates on dividends go up, dividend income plummets, so if dividend stocks are a part of your current strategy, be sure to proceed cautiously and keep informed with regard to the regulatory and political climate.