(Bloomberg News) John Rodwick cuts corners so he has money to spend on his seven grandchildren and 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," cooking and sleeping in their 19-foot vehicle, said the 72-year-old former business professor. With the value of their three-bedroom home plunging 30 percent in the past six years, the Rodwicks have become "very cost conscious," he said.
Federal Reserve officials say they're concerned that retirees like the Rodwicks are blunting the impact of record easing aimed at creating 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," William C. Dudley, president of the Federal Reserve Bank of New York, said in a speech on Oct. 15, helping to explain why the economic recovery has been weaker than expected.
Each day, some 10,000 of the 78 million Americans born between 1946 and 1964 -- the so-called baby boomers -- turn 65. The share of the population in that age group will swell to 18 percent by 2030 from 13 percent last year, according to the Pew Research Center in Washington.Impact Magnified
People usually save more as they near retirement. Now, the effect is magnified because Americans' wealth has been depleted by the financial crisis, which decimated home values and retirement accounts invested in stocks, according to Britt Beemer, chairman of America's Research Group Ltd., a Summerville, South Carolina-based consumer-behavior research company.
From 2007 to 2010, the median U.S. household net worth fell by 38.8 percent to $77,300, the lowest level since 1992, the Fed said in June in its Survey of Consumer Finances.
The saving rate in the U.S. has averaged 4.3 percent in the 39 months since the recession ended in June 2009, compared with an average of 2.3 percent in the same 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 Dudley, who is vice chairman of the policy-making Federal Open Market Committee.Incomes Hit
Meanwhile, retirement incomes are being hit by the very Fed policies that are intended to spur the three-year economic expansion and reduce an unemployment rate stuck near 8 percent or higher since early 2009.
Fed Chairman Ben S. Bernanke on Oct. 24 reaffirmed a plan to buy $40 billion of mortgage-backed securities a month 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 has already purchased more than $2.3 trillion in bonds.
Risks to the U.S. posed by slowing global growth and the European debt crisis are also among the reasons the Fed is keeping interest rates low. U.S. stocks rose as European finance chiefs met to discuss Greek aid, pushing the Standard & Poor's 500 Index up 0.3 percent to 1,384.53 at 1:21 p.m. in New York.
Japan's economy shrank last quarter as exports tumbled and consumer spending slumped, Cabinet Office data showed today in Tokyo. Gross domestic product fell an annualized 3.5 percent, the most since the earthquake and tsunami in early 2011.Interest Earnings
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 3.40 percent in the week ended 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 percent for the first time on Sept. 20, according to North Palm Beach, Florida-based Bankrate.com. On Nov. 7, the national average rate for the five-year CD was at a record low of 0.94 percent.
"All this money-printing hurts savers," Republican Representative Paul Ryan of Wisconsin, his party's 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."
Bernanke says the scant return for savers is preferable to the losses they may suffer if the central bank were to begin raising interest rates too early.'Significant Hardship'
Bernanke, in an Oct. 1 speech in Indianapolis, 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 with less upkeep, instead of traveling or buying luxury items and second homes, 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."Adult Children
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 Dallas-based research group that advocates free markets.
Retirees are consistently more frugal than younger age groups, said Pamela Goodfellow, consumer insights director at BIGinsight, a research company based in Worthington, Ohio.
"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."
The demographic shift will benefit companies such as UnitedHealth Group Inc., the largest U.S. health insurer, and TEVA Pharmaceutical Industries Ltd., which manufactures generic drugs, according to James Kee, who helps oversee $1.9 billion as president of South Texas Money Management Ltd., in San Antonio, Texas.
Also likely to benefit: manufacturers and retailers of discount consumer products, according to Brian Jacobsen, who helps oversee $207.5 billion as chief portfolio strategist at Wells Fargo Advantage Funds in Menomonee Falls, Wisconsin.Price Sensitive
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," he said.
Grisel Muina, 65, retired from her job as an insurance adjuster in Miami 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," 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.Challenges Seen
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 and co-chair of the committee that produced the Academy of Sciences report, said in an Oct. 16 speech in New York.
"There are fewer and fewer people working, and they are supporting more and more people who are not working," said Ferguson, chief executive officer of New York-based TIAA-CREF, which oversees $481 billion in assets for 3.7 million retirement clients. "This is a recipe for big fiscal challenges."
Six out of every 10 baby boomers between the ages 50 and 61 say they may have to postpone retirement, according to the Pew survey. They were most likely among age groups to have said their household finances worsened and they lost money on investments since the start of the 2007-2009 recession, Pew said.
Rodwick said he and his wife have pared their expenses wherever they can. They spent just $100 per day, gas included, on a summer road trip across the Great Plains and through New England to Nova Scotia. John, a former professor at Pikes Peak Community College in El Paso, Colorado, and Jean, a retired school principal, plan to remain in their home after its value plunged.
"We've simply decided to stay where we are," he said. "We probably will be dead and buried before the price gets back to the cost of the home that we actually built."