After watching the return on her bank savings plunge over the past three years, Lois Vrhel has given up on bank certificates of deposit.
"CD rates got down to where they were just paying around 1 percent, so I decided I could put that in some stocks where I get a far better return," the Trion, Ga., investor said. "I pulled out of all of my CDs earlier this year."
Record-low interest rates are robbing many seniors of the returns on savings accounts, money they used to rely upon as part of their retirement income.
Monetary easing by the Federal Reserve Bank has helped cut borrowing costs for recession-battered consumers and business borrowers, but the flip side is less money for many savers.
"It's actually a transfer of wealth from savers to banks and borrowers," said Chris Barnett, vice president of investments for Barnett & Co. in Chattanooga. "One of the things we have done to facilitate a recovery is to reduce interest rates as low as possible to help recapitalize banks and to help many borrowers to refinance their debts at better rates. But the deficiency now resides with those trying to make an income from their savings."
The average returns on interest-bearing deposit accounts slipped below 1 percent in July for the first time since the Market Rates Insight research service began keeping such records in the 1950s, according to its website.
Last week, a nationwide survey of banks by Bankrate.com found the average six-month CD rate fell to 0.35 percent and the average five-year CD fell to 1.71 percent. The yield on the average one-year CD held steady at 0.61 percent, according to Bankrate.com.
The average money market account yield lost 1 basis point last week, putting the average yield at 0.19 percent.
Other than a brief period in the fall of 2008, rates on bank savings, CD and bond funds haven't been this low since the 1930s.
Bank deposits dip
The amount of money on deposit in U.S. bank branches fell during the first half of 2010 for the first time in nearly two decades, according to Market Rates Insight.
Greg McBride, a senior financial analyst at Bankrate.com, said that trend "is on steroids now because interest rates have been cut to the bone."
But with many investors still wary about the stock market or higher-risk bonds, banks still are holding plenty of relatively cheap money.
"Savers are getting less than in the past, but our deposits have still grown," said Kenny Dyer, the Chattanooga market executive for CapitalMark Bank. "I think people are looking for a safe haven with their money in this economy."
Vrhel studies the stock market and believes she can find low-risk stocks with higher yields than the government-insured CDs they are replacing.
But advisers caution investors from reaching for too much yield by taking on excessive risk or extending investments too long, when inflation could reignite and cut the real value of the return.
"People have to go farther out on the risk spectrum to get the interest they are used to getting," said Joe Franklin, president of Franklin Wealth Management in Chattanooga. "Unfortunately, when interest rates start rising again, that could hit many savers with bond investments in the wallet again because bond values tend to drop when interest rates go back up again. You've got to be careful because the fixed-income market is pretty treacherous right now."
The bad news for savers has been good news for lenders and borrowers, however.
The Federal Deposit Insurance Corp. said that second-quarter profits at the banks it insures were the highest since the summer of 2007. In the April-to-June period, FDIC-insured banks netted $21.6 billion - a $26 billion improvement from the $4.4 billion net loss the industry posted in the same period in 2009.
"Earnings have grown, and most asset quality indicators are moving in the right direction," FDIC Chairwoman Sheila Bair said last month.
Franklin said FDIC insurance offers guaranteed returns and protection to savers and "many people want that safety."
But many savers also are branching out into corporate bonds, preferred stock or other higher-yielding investments, even though they carry more risk.
"It's definitely a difficult market for fixed-income people," he said.
But experienced investors in fixed-income instruments insist the market can still be profitable - and more secure than the stock market.
Raymond Eldridge, 86, a retired postal worker and court officer, has been investing in tax-free municipal bonds for nearly 60 years. By buying insured and rated municipal bonds, sometimes at a discount, through local brokers and online trading, Eldridge said he continues to earn an average 5 percent yield. Last week, he bought Guam government bonds at 4.3 percent.
"I check the market every day, and when rates go up you can usually buy bonds at a discount, and when rates come down, older bonds with higher yields become more profitable," he said. "I'm a simple country boy, but I know I have done very well by saving my money and buying bonds."
Contact Dave Flessner at firstname.lastname@example.org or 423-757-6340. Follow him on Twitter at twitter.com/chattreporter.