September 7, 2012
Q: My retirement CDs, which are currently paying 5.2 percent, will mature next year. Of course, I'm concerned about where I can put the money when that happens. I'm a 74-year-old widow who has been living on Social Security and the required minimum distribution from my IRA. My newspaper in Arizona has ads for what looks like too-good-to-be-true returns. It says: Attention CD owners 7.0% APY, and principal and interest are totally secure. The firm, according to the ad, has an A+ rating with the Better Business Bureau and has been serving clients for over 11 years. Can this be a safe investment? I'm pretty much convinced it isn't.
— V. M.
A: You are right. This is too good to be true and you should feel "totally secure" that it will not protect your principal and interest.
I feel sick thinking about all the seniors who have been lured into awful investments with these misleading promises lately. Seniors are easy pickings — whether at banks, financial planning offices, insurance firms or investment firms — because retirees are living off their savings and starved for income. The Federal Reserve is making it impossible for savers to use safe investments and earn income much above 1 or 2 percent. This could last awhile because the Fed has said it is likely to keep interest rates near zero until late 2014.
Let me translate this to anyone dreaming of a 7 percent return on anything protected. It cannot happen because the Fed has designed the system so high interest and safe returns do not go together. The Fed is trying to get people to take chances with their money because Americans are scared, and yet the economy needs chance-taking on stocks and risky bonds to spur growth. As long as the Fed keeps interest rates low no one can offer a high-interest, safe investment because financial firms can't earn a high return without taking risks.
"People are getting desperate," said Sylvia Matteson, a Tucson, Ariz., financial planner. "We have people coming to us with offers like 7 percent guaranteed all the time."
If the ad you have seen does apply to a CD, it may be like those Matteson has seen: 7 percent interest might apply to maybe the first $500 you invest along with another $19,500 in a $20,000 CD. And the 7 percent teaser rate on the $500 might evaporate after a short time — maybe six months — though your $20,000 must stay invested much longer.
The product you've seen advertised might not be a CD at all. Notice the wording: "Attention CD owners." This merely means they are preying on CD owners who are frantic for interest income.
Lately, seniors have been lured by so-called structured products that sound safe because they use "protection" or "guaranteed." But the products are just the opposite. The investments are often risky, and a guarantee might apply to only 10 percent of your money, if anything. Further, you might be required to leave your money invested in the risky investment for 10 years even if it is turning worrisome or you need to withdraw it for a medical emergency.
Brokers might make structured products sound mild-mannered, but this is often because the products are so complex even those selling them do not understand them. These products are definitely not a CD substitute. CDs, after all, are simple and completely guaranteed if they fall within a bank's FDIC protection of up to $250,000 per depositor.
Another possibility is that the ad is for an immediate annuity, said Richard Getman, a Charleston, S.C., financial planner. There is nothing wrong with annuities if you understand them, but Getman said people are lured by promises of 7 percent interest when it is not true. Rather, what happens is that a person provides, say, $100,000 to the insurance company and for years the company might pay the person back $7,000, using the individual's money. After about 14 years when the money is used up, the insurance firm pays the $7,000 each year if the person is still alive. At this point the insurance firm is dipping into its own funds; not the individual's, said Getman. "You might actually have to live to around 100 to really make 7 percent on your money."
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