John Folsom holds a solid job in medical device sales and has put two children through college. He has lived his life, as he sees it, "trying to play by the rules."
He and his wife invested for retirement by socking money into safe mutual funds to build a nest egg that could support their dream of one day having a house on a lake. But at 53, Folsom looks at his retirement portfolio and sees that "the rules" aren't working.
The market crash and housing collapse hammered his net worth. Now the Apple Valley man's life savings are earning about half what he had expected, dragged down by record-low interest rates.
"All of our calculations have been thrown asunder, and everyone has to rethink the whole deal," said Folsom said, who is planning to push back his retirement five years, possibly until he's 67.
The Federal Reserve's near zero interest-rate policy, aimed at stimulating the economy, has created bargains for borrowers refinancing a mortgage or buying a car. But the low rates are penalizing "savers" such as seniors and others on fixed incomes, forcing millions of middle-class Americans to reconsider how they will live when they retire, if they can retire at all.
"We're not really seeing the positive benefit of low rates, but we're seeing a huge negative hit," said Tim Gillaspy, who recently retired as Minnesota's demographer. "And that needs to be discussed as a national policy issue."
The low-interest rates are the latest financial challenge for a wave of baby boomers on the cusp of retirement. Already, an estimated 44 percent of boomers between the ages of 48 and 64 will run short of money in retirement for their basic needs and uninsured health care costs, according to Employee Benefit Research Institute (EBRI), a nonpartisan research group in Washington.
As traditional pensions fade away, people approaching retirement typically shift their money into safer fixed-income investments, such as bonds, to generate income to carry them through their golden years. That leaves them more vulnerable when interest rates are low.
Combined with a volatile stock market, the rock bottom rates make you feel like "there's nowhere to go" with your savings, said Nancy Nonini, whose Apple Valley company Retirement Education PLUS counsels companies on aging issues.
Meanwhile, there's concern that declining interest returns will diminish the purchasing power of savers, which would offset the boost from making borrowing cheaper.
"It's going to have repercussions not for one or two years, but basically for the rest of our lives," Gillaspy said.
Just getting by
The interest-rate squeeze isn't the sort of "Dow Dives!" shock that happened in 2008. Gordon Foster, a 74-year-old retired CFO in Lakeville, mused that it's more of a "slow erosion you don't notice."
Some, however, are noticing.
At 91, retired mechanic Glenn Summers does all his own yard work at his Bloomington home. He has kept most of his money in safe havens such as money market accounts for income to supplement his Social Security and pension. The nest egg used to generate $10,000 to $15,000 more than it does now.
Like many seniors interviewed for this story, Summers is loathe to complain about the losses. He gets by, he said, "but I don't have any extra."
Altogether, personal interest income in the U.S. totaled $986 billion last year -- down about 25 percent from 2007, according to the U.S. Bureau of Economic Analysis. That's $332 billion forgone.
Retirees feel the undertow, but so do baby boomers eyeing retirement. Folsom, for instance, had planned on returns of 5-7 percent on his investments. He had to scratch that out and work with 2-5 percent.
Will it be enough? "That's a good question," he said.
Fed Chairman Ben Bernanke has testified before Congress that he's well aware of the savers' plight. In February, he acknowledged that it was a tradeoff, but it was necessary to get the overall economy back to health.
Fed governor Sarah Bloom Raskin downplayed the impact of the interest rate policy back in March, noting that interest-bearing assets are only a "modest" portion of household assets, estimating it was less than 7 percent.
A Star Tribune analysis of federal data, however, shows that 17 percent of household assets were in interest-bearing classes last year, as opposed to say, stocks or pensions. That's up from 15 percent before the crash, meaning households are even more exposed to interest rates fluctuations.
As Jack Ablin, chief investment officer at Harris Private Bank in Chicago, sees it, the Fed's policy leaves savers and retirees as "collateral damage."
The situation has forced middle class Americans to make some difficult choices: take greater risks with their money, work longer, temper retirement expectations and safe-keep hard-earned savings money in accounts that won't earn much.
Many people are choosing ultra-safe vehicles such as bank accounts and certificates of deposit that pay next to nothing. People wary of the stock market and economic uncertainties have more than $8 trillion in such accounts, according to bank research firm Market Rates Insight.
The desire for safety has investors clamoring for U.S. Treasuries and investment grade corporate bonds -- staples in retirement portfolios -- driving those interest rates lower as well. Roger Aliaga-Diaz, a senior economist at mutual fund giant Vanguard Group, said he expects investment grade bond portfolios to average returns of 2-3 percent for the next 10 years.
"That's scary," Aliaga-Diaz said. "There is no easy way out of this."
The impact of low interest rates has affected the cost of insurance as well. Unable to make the investment returns they once enjoyed, many life insurers are hiking premiums or scrapping some lines of business, such as variable rate annuities. Average premiums for long-term care insurance, for instance, have jumped 30-50 percent since 2007, according to industry estimates.
Clare Gallagher, 73, said she "just about fell over" when she got a letter recently from her insurer, John Hancock. It said her yearly premium would rise from $900 to $2,600 -- unless she reduced her benefits, which she did.
Gallagher, who lives in Zimmerman and used to a run a transportation business for handicapped people, still works as a substitute teacher. She said she was "madder than hell" about the change to her long-term care insurance and fired off a letter to the state Department of Commerce, which regulates insurers. She got a letter back saying such increases were authorized because the companies couldn't predict the drop in interest rates and its dramatic impact on their business, she said.
"This is crazy," Gallagher said. "What should I do?"
Bill Wixon, head of Wixon Financial Advisors Inc. in Maple Grove, said he sees many people "paying more and getting less" for popular retirement products. Wixon and other financial planners describe a mix of frustration, fear, resignation and even some hopelessness among older clients.
"People are scared," Wixon said. "People can't live on interest anymore."
David Tysk, a financial adviser with Ameriprise in Edina, said some are altering their spending to adjust to lower returns -- delaying buying a new car, deferring vacations, opting to rent a home instead of buy.
"The story here is that you are seeing a deterioration of purchasing power and net worth that's not talked about," Tysk said.
For Bob Geyen, a 67-year-old retired school teacher and administrator in Shakopee, low rates have just made a bad situation worse. His pension helps, but Geyen estimates that more than half the income he and his wife live on is from Social Security. They have a good life, he said, but he worries about falling into poverty.
It's hard to untangle the effects of low-interest rates from everything else affecting seniors, Geyen said, such as lower home values, and Social Security and Medicare not keeping up with costs. As Geyen sees it, he and his wife were sensible with their choices and yet they still feel unsettled.
"Everything I had as an asset is no longer the asset it once was," Geyen said. "It gives us a very shaky feeling about our future."
Mark Skeie, a 65-year-old 3M retiree who lives in Lake Elmo, describes a more subtle pinch from low rates. The adjustments he sees are more like nixing the Hawaii vacation and driving to San Diego instead.
The executive director of the Vital Aging Network, Skeie said most retirees are taking the low rates in stride with "an understanding that this is an ebb and flow situation."
The income playbook many financial planners use now looks something like this: real estate investment trusts, preferred and dividend-paying stocks, publicly traded master limited partnerships such as oil and gas pipelines, and high-yield (junk) bonds.
Folsom said he thought he would have his savings split 50/50 between stocks and more conservative plays such as bonds by now. Instead, he has 35 percent in bonds -- and half of those are riskier high-yield "junk" bonds.
Indeed, with so many people searching for higher yields, junk bonds are back in vogue despite their boom-bust history.
Mark Simenstad, head of fixed income mutual funds for Thrivent Financial, calls them "a pretty mainstream market," but acknowledges they're called high-yield for a reason. The bonds promise higher returns, but since they are IOUs from companies with poor credit quality, they carry higher risks of default.
More retirees with less income means the economy could feel the drag from less consumer spending. The critical question is how long will interest rates stay low, Jack VanDerhei, director of research at EBRI's Center for Research on Retirement Income. The Fed has committed to keeping rates near zero through 2014. If rates stay low beyond that, retirees spending less could be "the tip of the iceberg," he said.
"You're going to have retiree households that are going to literally run out of everything but Social Security and perhaps whatever housing equity they have," VanDerhei said. "Many of today's boomers are going to end up depleting their assets and at their point you get some really interesting societal questions like, do you expect to move in with your kids?"
Tony Webb, an economist at the Center for Retirement Research at Boston College, sees low interest rates driving an inter-generational shift in the country's spending power, pushing it from older people who tend to spend less to younger people who tend to spend more. Yes, it's bad for older Americans who save, he said, but it's not necessarily bad for the economy.
Webb said he has no doubt the low rates were essential to pull the U.S. out of recession.
"If the Fed hadn't cut interest rates, I'm sure we would have had a major depression," he said. "We really were staring the 1930s in the face."
Jennifer Bjorhus • 612-673-4683