Savers are getting destroyed by super low interest rates

Bond yields are at record lows. That’s great news if you want to borrow money right now but it’s terrible for anyone trying to save by putting cash in the bank or buying US Treasury bonds.

Now the Federal Reserve is making it painfully clear just how worried it is that the coronavirus pandemic will hurt the US economy.

The Fed slashed rates in an emergency meeting earlier this month and is expected to cut them further at its regularly scheduled meeting on March 18 – perhaps bringing them all the way back to 2008 Great Recession/Global Financial Crisis era levels of 0%.

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The rate cuts – along with similar moves by other central banks around the world – has pushed long-term and short-term Treasury bond yields lower as well.

A 3-month US Treasury currently yields just over 0.25% while the 10-year rate is about 0.9%. Those rates were even lower earlier this week when stocks were at their worst levels and the Fed said it would support the broken Treasury market.

And the average rate for a bank savings account is currently a paltry 0.1% according to Greg McBride, chief financial analyst at Bankrate.

But all the while, Americans have been continuing to put more money into savings accounts.

Money earning next to nothing in a bank or bond

The personal savings rate has steadily climbed for the past few months and hit 7.9% in January, according to government figures.

That’s the highest level since last April. It means that more people are getting a lot less bang for their proverbial buck.

This poses a problem for more conservative investors, particularly those approaching retirement age or who have already left the work force.

These risk-averse investors may be forced into buying more speculative assets if they have any hope of earning a decent return.

US Federal Reserve Chairman Jerome Powell gives a press briefing after the surprise announcement the FED will cut interest rates on March 3, 2020 in Washington,DC. - The US Federal Reserve announced an emergency rate cut Tuesday, responding to the growing economic risk posed by the coronavirus epidemic and giving President Donald Trump the stimulus he has called for. In a unanimous decision, the Fed's policy-setting committee slashed its key interest rate by a half point to a range of 1.0-1.25. (Photo by Eric Baradat/AFP/Getty Images)

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The dividend yield for the S&P 500 is currently over 3%. But stocks have plunged in the past few weeks.

“There is a natural reaction when government bonds are not yielding much to move into stocks. But that increases the level of risk,” said Wade Pfau, professor of retirement income at The American College of Financial Services. “It’s kind of a perfect storm. There are no good options.”

Pfau advises younger investors who aren’t near retirement age to stay the course, because this too shall pass. But if you are approaching retirement age, it might be time to get creative.

Annuities from insurers could provide some stable income, Pfau said. People could also consider taking small loans from the cash value of their life insurance or getting a reverse mortgage. Some might argue that those are riskier, last resort types of moves.

But the best thing that any saver can do right now is to hunker down and spend less.

“Don’t spend irresponsibly. If this is a temporary downturn, then you should be able to dig out of a short-term hole in your portfolio as long as you cut back,” Pfau said.

Rates could remain low for a long time

Other options exist, too.

Bankrate’s McBride points out that many online banks – including digital divisions of much larger financial institutions like BMO Harris (BMO), Citigroup (C) and the Marcus unit of Goldman Sachs (GS) – offer savings rates closer to 2%.

That’s not much, but even those relatively low savings rates are a better alternative than the prospect of losing cash in the stock market.

“At this point, investors need to be more focused on the return of their money than the return on their money,” McBride said.

He added that investors may need to get used to extremely low rates for the foreseeable future. The last time the Fed slashed rates to zero in December 2008, it did not hike them until seven years later.

“It is easy to cut rates, but very difficult to raise them again,” McBride said.