John Rodwick scrimps and saves so he can spend on his seven grandchildren and cruise around the Rocky Mountains with his wife, Jean, in their motor home. “My wife and I love to travel, so that is our one big expense, but we are very, very conservative” otherwise, says the 72-year-old former business professor. The couple doesn’t go to hotels or restaurants: They cook and sleep in their 19-foot, blue-trimmed Roadtrek. With the value of their home dropping 30 percent in the past six years, the Rodwicks have become “very cost-conscious.”
Federal Reserve officials say they are concerned that retirees like the Rodwicks are making it harder for the central bank to create more jobs for those still working. Older people are more likely to avoid purchases of houses, cars, and other pricey items that the Fed is trying to encourage with record-low interest rates. Their growing numbers are making the Fed’s job even harder.
“Spending decisions of the older age cohorts are less likely to be easily stimulated by monetary policy,” said William Dudley, president of the Federal Reserve Bank of New York, in a speech on Oct. 15. Each day, some 10,000 of the 78 million American boomers, born between 1946 and 1964, turn 65. The share of the population that’s made it to that age will swell to 18 percent by 2030 from 13 percent last year, according to the Pew Research Center in Washington.
People usually save more as they near retirement, and they’re saving extra now that Americans’ wealth has been depleted by the financial crisis. From 2007 to 2010, median U.S. household net worth fell by 38.8 percent to $77,300, the lowest level since 1992, the Fed said in June. The savings rate has averaged 4.3 percent in the 39 months since the recession ended, compared with an average of 2.3 percent in the same period before the recession. Retirees and older workers also will likely cut spending as they anticipate tax hikes and cuts in Medicare and Social Security. Six out of every 10 baby boomers between the ages of 50 and 61 say they may have to defer retirement, according to the Pew survey. People in this age group were most likely to say their finances worsened since the start of the 2007-2009 recession.
Many retirees are staying in their homes, moving closer to their children, or getting smaller houses with less upkeep, instead of traveling or buying luxury items and second homes, says Britt Beemer, chairman of America’s Research Group, a consumer-behavior research company. “The practical has taken over the aspirational. If you’re not moving … to a brand new home when you retire, all those items you might have purchased are no longer on the shopping list.” Boomers are opting to spend more on education, mortgage debt, and their adult children and less on entertainment, dining, furniture, and clothes, according to a report from the National Center for Policy Analysis in Dallas.
Retirement incomes are being hit by the Fed policies meant to safeguard the recovery. Fed Chairman Ben Bernanke on Oct. 24 reaffirmed a plan to hold the main interest rate near zero at least through mid-2015. While this stimulates the economy, it also reduces interest income for savers. The interest rate on a five-year certificate of deposit fell below 1 percent for the first time on Sept. 20, according to rate tracker Bankrate (RATE).
Grisel Muina, 65, retired from her job as an insurance adjuster in Miami last year and is now seeking part-time work. She’s cut spending on food, cable, and home maintenance and may move into an apartment that she owns to let her daughter and grandchildren use her house. “I used to spend a lot of money, let me tell you,” Muina says. “Now I have to watch every penny. Once you’re used to a certain way of living, it’s hard to reduce.”