Nonretired U.S. Investors Grow Optimistic, Retirees Don't

PRINCETON, NJ -- U.S. investors who are not retired grew much more positive than retired investors about the economic and investment climate in March. The Wells Fargo/Gallup Investor and Retirement Optimism Index score for nonretirees increased to +38 in March from -8 in November, the last time the survey was conducted. In sharp contrast, the index score for retirees was +7 in March, up from -5 in November. This more than 30-point difference in optimism between retirees and nonretirees comes after six quarters of closely aligned sentiment between the two groups of investors.

The Wells Fargo/Gallup Investor and Retirement Optimism Index is a quarterly survey, which defines investors as those having at least $10,000 of investable assets and is a broad measure of investor perceptions that tends to be a precursor of economic activity. The March 14-24, 2013, survey included interviews with a random sample of 1,035 investors. The average age of nonretirees is 46, while that of retirees is 70.

Largely as a result of the surge among nonretired investors, overall investor optimism rose to +31 in March from -8 in November -- consistent with the sharp increase in the stock market over the same period of time. The index peaked at 178 in January 2000, just before the dot-com bubble burst, and hit its low of -64 in February 2009, just before the equity markets hit bottom in March 2009.

Index components suggest that retired investors are less optimistic than their nonretired counterparts partly because they are more concerned about their inability to maintain their current income. Retirees are also less optimistic about future economic growth in the U.S. than are nonretirees.

Retirees See Low Interest Rates Doing More Harm Than Do Nonretirees

One reason retired investors may be less optimistic about the investment environment than their nonretiree counterparts may involve their differing views concerning the impact of low interest rates. Low rates help consumers, particularly when it comes to getting loans for homes, cars, or college tuition. However, the downside of low rates is they leave investors with low returns on their investments such as savings accounts and CDs.

When asked if the benefits of low interest rates "outweigh any costs," 69% of nonretired investors agree, compared with 51% of retirees. More importantly, half of retired investors say today's low interest rates have done "a great deal" or "quite a lot" of harm to savers and investors, compared with 25% of nonretired investors who say the same.

Investors See Positives and Negatives to Low Interest Rates

Overall, investors believe today's low interest rates have been of benefit in several areas. For example, three in four investors see low interest rates as having a positive impact on housing. And, in the past two years, 33% of investors, including 39% of nonretirees and 13% of retirees, have taken advantage of the rates and refinanced their home. For investors who refinanced, 43% say they are using the money they saved to reduce the number of years left on their mortgage and 32% say they are saving the money.

About half of investors also think low interest rates are having a positive impact on the performance of the overall economy and the stock market. Four in 10 feel low interest rates are having a positive impact on job growth.

On the other hand, nearly half of all investors (47%) say today's low interest rates will make them live "less comfortably" in retirement. And, 43% of all investors fear low rates will mean they will "outlive their money" in retirement. Thirty-three percent of investors say low rates will reduce the financial help they give their children, 32% say low rates will increase the risk they take when they invest, and 30% say they will reduce their charitable giving.

Implications

Given the surging stock market of 2013, it is not surprising that investors are more optimistic than they were after last year's presidential election. The difference in optimism among retired and nonretired investors, however, is surprising. Differing views of the impact of low interest rates and the slow growth of the U.S. economy would seem to be part of the explanation.

Over the past five years, the Federal Reserve has done everything possible to keep interest rates low. More recently, other central banks around the world have joined in the low rate effort, flooding the global economy with liquidity.

The majority of investors see some upside to today's low interest rates, particularly as they benefit stocks on Wall Street, the economy, and the housing market. However, a substantial minority of investors, particularly retirees, see today's historically low interest rates as having some major costs.

At this point, it is not clear when or how the global economy is going to return to "real" interest rates and the benefits they provide. Regardless, monetary policymakers should keep in mind that as long as they pursue their current extraordinary low interest rate policy, although investors overall are supportive, a significant number of them, particularly retirees, believe low rates are doing substantial harm to savers and investors.