How bad is the current yield famine if we measure it in actual food? Last week I provided a casual measure when I pointed out that a $10,000 bank CD would provide interest income of $34 in a year. The quarterly interest payment of $8.50 isn't enough to buy lunch for two at McDonald's -- once every three months.
With yields like that, retired people who get most of their income from their savings may be feeling a bit hungry. Meanwhile, the chairman of the Federal Reserve suggests we should eat cake for the foreseeable future.
We can explore the relationship between yields and food for retirees by combining three kinds of data:
-- The cost of food for a retired couple, as measured by the USDA;
-- The 401(k) account balances of near-retirees at least 60 years old with many years at the same company;
-- And a consistent measure of portfolio yield, such as my Life of Riley Index.
Sadly, we can't track this back a long way. The USDA food budgets go back only to 1994, and the Employee Benefit Research Institute data on 401(k) account balances only go back to 2003. What the data show, however, is that retiree 401(k) accounts have lost about half their food-buying power since 2006.
Yes, you read that right: a 50 percent loss in food-buying power.
In 2006, the average 401(k) balance for workers who were at least 60 years old with long years of service in the same company was $209,625. The average balance is higher than the median balance, so it is reasonable to say that only a small fraction of workers retire with greater amounts of money saved. Most retire with much less.
That year, a portfolio with half invested in the S&P 500 and half in five-year Treasury obligations provided a yield of 3.31 percent, the highest since 2000. The portfolio produced income of $6,939 for the year.
The Department of Agriculture tracks four carefully constructed levels of diet, and measures them for people of different ages. In 2006 the monthly cost of a "moderate" diet was $426.10 for a couple at least 50 years old. That's $5,113 a year. As a result, a hefty 401(k) account balance covered the cost of food at home by 125 percent.
(If you want to know more about these diets, check the USDA website. Two other diet measures are less expensive than the "moderate" diet. There is also a "liberal" diet that cost $510.40 a month in 2003, so it was possible to spend generously on food in 2003 and not spend more income than the 401(k) plan balance produced.)
Only four years later, the combination of falling yields, diminished accounts and rising food prices worked to make the average 401(k) account balance entirely inadequate just for the purchase of food. Here's what happened.
At the end of 2010, the same 401(k) account balances were still recovering from the 2008 financial crisis, with an average value of $202,329. The average portfolio yield had fallen to 1.96 percent, so income had fallen dramatically, to $3,966. Meanwhile, the cost of food had risen to $6,328. As a consequence, every dime of 401(k) account income worked to cover only 63 percent of the cost of food, down from 125 percent just four years earlier.
Since then, things have gotten worse. In January the monthly cost of the moderate diet was $568.50, up 8 percent from the 2010 average cost. But the yield on the same portfolio had fallen to only 1.43 percent. To support this food cost at current yields, a retiree would need to have a 401(k) account balance of $477,063 -- well over twice the average account balance among the top savers in 2010.
And remember, this is just to pay for food.
It is reasonable to say that the Federal Reserve has declared war on senior citizens who have saved and invested. It is a siege war, a war of attrition against a population that has both limited resources and limited time. It is also an undeclared war that has been assented to by presidents from both the Republican and Democratic parties, something seniors should bear in mind this November.
CORRECTION: Many readers pointed out that I had misread my calculator last week. To produce $500 a month in interest income at the current yield of 0.34 percent, you would need $1,764,706 in savings, 10 times as much as the $176,470 stated in the column.
On the Web:
-- USDA website link to diet costs: www.cnpp.usda.gov/USDAFoodCost-Home.htm
-- Jack VanDerhei, "401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2010," ebri.org, December 2011: ebri.org/pdf/briefspdf/EBRI_IB_12-2011_No366_401(k)-Update.pdf
-- Scott Burns, "The Jumbo CD in Your Garage," (3/18/12): assetbuilder.com/blogs/scott_burns/archive/2012/03/16/the-jumbo-cd-in-your-garage.aspx
(Questions about personal finance and investments may be sent by email to firstname.lastname@example.org. Please visit www.assetbuilder.com to comment on any of his articles, find referenced web links or to discuss personal finance topics on his forums. Questions of general interest will be answered in future columns and on the website.
(Scott Burns is a principal of the Plano, Texas-based investment firm AssetBuilder Inc., a registered investment adviser. The opinions of this article do not necessarily reflect the views of AssetBuilder Inc. This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation or endorsement of any particular security, product or service.)