John Rodwick cuts corners so he has money to spend on his seven grandchildren and to cruise around the Rocky Mountains with his wife, Jean, in their blue-trimmed Roadtrek motor home.
“My wife and I love to travel, so that is our one big expense, but we are very, very conservative,” said the 72-year-old former business professor. With the value of their three-bedroom home plunging 30% in the past six years, the Rodwicks have become “very cost-conscious,” he said. On trips, they cook and sleep in their 19-foot vehicle.
Federal Reserve officials said they're concerned that retirees such as the Rodwicks are blunting the impact of interest rates kept low to create jobs. The reason: Older people are more likely to forgo purchases of houses, cars and other big-ticket items that the Fed is trying to encourage with near-zero interest rates. And their numbers are growing, making the Fed's task ever harder.
“Spending decisions of the older-age cohorts are less likely to be easily stimulated by monetary policy” — which helps explain why the economic recovery has been weaker than expected, William C. Dudley, president of the Federal Reserve Bank of New York, said in a speech Oct. 15. Each day, some 10,000 of the 78 million baby boomers — those born between 1946 and 1964 — turn 65. The share of the population that is 65 or older will swell to 18% by 2030, from 13% in 2010, according to the Pew Research Center.
People usually save more as they near retirement. Now the effect is magnified because Americans' wealth has been depleted by the financial crisis, which hammered home values and retirement accounts invested in stocks, according to Britt Beemer, chairman of America's Research Group Ltd. Inc.
From 2007 to 2010, the median U.S. household net worth fell by 38.8% to $77,300, the lowest level since 1992, the Fed said in June in its Survey of Consumer Finances.
The savings rate in the U.S. averaged 4.3% in the 39 months from the end of the recession in June 2009 through September. That compares with an average of 2.3% in the 39-month period before the start of the recession in December 2007.
Retirees and older workers probably will reduce spending as they anticipate tax increases and cuts in Medicare and Social Security, said Mr. Dudley, who is vice chairman of the policymaking Federal Open Market Committee.
Meanwhile, retirement income is being hit by the very Fed policies that are intended to spur the three-year economic expansion and reduce an unemployment rate stuck at 8% or higher since early 2009.
Fed Chairman Ben S. Bernanke on Oct. 24 reaffirmed a plan to buy $40 billion a month in mortgage-backed securities and keep the main interest rate near zero at least through mid-2015. The Fed has pursued a zero-rate policy since December 2008 and already has purchased more than $2.3 trillion in bonds.
While the Fed's policies stimulate the U.S. economy by making it cheaper to borrow — the average interest rate on a 30-year fixed-rate mortgage was 3.4% in the one-week period through Nov. 8, close to the lowest on record — they also reduce interest income for savers.
The interest rate on a five-year certificate of deposit fell below 1% for the first time Sept. 20, according to Bankrate.com. On Nov. 7, the national average rate for the five-year CD was at a record low of 0.94%.
“All this money-printing hurts savers,” Rep. Paul Ryan of Wisconsin, the Republican vice presidential nominee, said during remarks at an AARP event in New Orleans on Sept. 21. “It threatens the future value of our money — and seniors are bearing most of the risk.”
Mr. Bernanke said the scant return for savers is preferable to the losses they could suffer if the central bank were to begin raising interest rates too early.
In a speech on Oct. 1, Mr. Ber-nanke said low interest rates have “involved significant hardship for some.” Still, if the Fed “were to raise rates now, before the economic recovery is fully entrenched, house prices might resume declines, the values of businesses large and small would drop, and, critically, unemployment would likely start to rise again.”
Many retirees are staying in their homes, moving closer to their children or getting smaller houses requiring less upkeep, instead of traveling or buying luxury items and second homes, Mr. Beemer said.
“The practical has taken over the aspirational,” he said. “If you're not moving from your home and not moving to a brand-new home when you retire, all those furniture items you might have purchased are no longer on the shopping list.”
The postwar generation is shifting spending toward education, mortgage debt and their adult children, and away from entertainment, dining, furniture and clothes, according to a report last month from the National Center for Policy Analysis, a research group that advocates free markets.
Retirees are consistently more frugal than younger groups, said Pamela Goodfellow, consumer insights director at Biginsight, a research company.
“If you've got to put your kid in college, you've got to spend,” she said. “Retirees have almost a luxury of not having quite so many spending demands put upon them.”
Retirees will “be more price sensitive, and so perhaps that's going to benefit those businesses that really target some of the lower price points,” said James Kee, who helps oversee $1.9 billion as president of South Texas Money Management Ltd.
Grisel Muina, 65, retired from her job as an insurance adjuster last year and is seeking part-time work to help make ends meet. She said she has cut spending on food, cable television and home maintenance, and may move into an apartment that she owns, and let her daughter and grandchildren use her house.
“I used to spend a lot of money, let me tell you — I was a compulsive buyer,” Ms. Muina said. “Now I have to watch every penny that I spend, and it's hard for me. Once you're used to a certain way of living, it's hard to reduce.”
To ensure sufficient income later in life, Americans will need to increase savings, delay retirement and prepare for changes to entitlements such as Social Security and Medicare, according to a report by the National Academy of Sciences.
The U.S. faces “challenges to our future economic strength” because of the aging population's demands on the federal budget, Roger Ferguson, a former Fed vice chairman who served as co-chairman of the committee that produced the Academy of Sciences report, said in an Oct. 16 speech.
“There are fewer and fewer people working, and they are supporting more and more people who are not working,” said Mr. Ferguson, chief executive of TIAA-CREF.
“This is a recipe for big fiscal challenges.”