NCPA - National Center for Policy Analysis

Stimulus Plan Hits Risk-Wary Seniors

November 17, 2010

While American seniors try to live off their interest-bearing savings in uncertain times, they may well find themselves unintended victims of the Federal Reserve System as it moves aggressively to push interest rates lower, says the AARP Bulletin.

  • The Fed hopes that by buying an additional $600 billion in bonds it will inject the economy with a huge supply of cheap money that will spark stronger economic and job growth.
  • This second round of monetary stimulus, known as "quantitative easing," or QE2, is designed to force long-term interest rates lower, making companies more likely to expand their business.
  • But there is another side to the equation: Risk-averse seniors who rely on the interest from CDs, money market funds or long-term bonds to supplement their Social Security income will likely find it more difficult to get a decent rate of return.

"If there is a rate of return called 'diddly squat,' that is about what these investments are paying," says Pamela Villarreal, a senior policy analyst with the National Center for Policy Analysis.

The Fed acted because the overall national economy hasn't really entered a sustainable growth trajectory, and the prospects for an additional round of direct government spending, like the Obama stimulus program of 2009, are dim, says AARP.

Villarreal suggests that older Americans should lose their inhibitions and reliance on conservative fixed-income bonds and consider investing in low-fee stock mutual funds or stock index funds, which are designed to mirror the overall performance of the stock market.

Source: Michael Zielenziger, "Stimulus Plan Hits Risk-Wary Seniors," AARP Bulletin, November 16, 2010.

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