Exceedingly low interest rates on federally guaranteed savings can be hazardous for people who plan to rely on income from such safe funds in retirement, advisers here say.

Traditionally, people at or near retirement age have been advised to secure large amounts of their retirement savings in insured income-generating accounts. Many people today, however, must modify that strategy in an attempt to preserve retirement assets, says Don Moulton, a certified financial planner and principal at Retirement & Tax Planning Specialists Inc., of Spokane Valley.

The Wall Street Journal, citing the most recent available U.S. Department of Labor statistics, reported earlier this month that interest income for American households headed by people 65 and older averaged $2,564 in 2009, down 34 percent from 2007 and the lowest since 2003.

Since then, interest rates have continued to fall.

As of January, the average interest rate paid on safe investments, such as short-term savings accounts, timed certificates of deposits (CDs), and money market funds, stood at 0.24 percent—about one-tenth the level of late 2007 and the lowest on record dating back to 1959, the Wall Street Journal noted.

"It definitely has created a new landscape," Moulton says of such low interest rates.

Too much reliance by retirees on interest income could result in a two-pronged problem for retirees, he says. First, it could require retirees to dig more deeply into their savings than they had planned, and second, people in such circumstances would have reduced principal to provide income if interest rates improve.

"That could start a downward spiral toward a deficit," Moulton says.

Jerry Felts, managing principal and certified financial planner at the Spokane firm Jerry Felts CFP, says returns on guaranteed income-generating funds are less than half of what they were four or five years ago.

"If you have income assets in a 401(k)or retirement funds in savings accounts, or CDs, you're not very happy," Felts says. "In that realm, there's not anything paying over 2 percent."

A 2 percent rate of return might be acceptable when inflation isn't a concern, Moulton says, adding, "I wouldn't say that's the case when we see the price of gas or food," he says.

Moulton says guaranteed accounts still are useful for some retirement purposes. He advises some to keep two or three years of "safe money" for living expenses, if they have the means to do so, as one component of their retirement strategy.

Low interest rates, however, affect the amount of money that has to go into such accounts at the outset, Moulton says. "More money has to go into the bucket that's going to provide that income than if interest rates were at 5 percent or 6 percent," he says.

Felts says savings accounts and CDs are ideal for holding money to be reserved for emergencies or planned major expenses, such as a new furnace or roof.

"For someone trying to accumulate assets to retire, I don't recommend them unless the client is totally risk-averse," he says.

Clients must be able to tolerate some risk if they want to build their assets, Felts says. That means moving away from savings products insured by the Federal Deposit Insurance Corp.

"Most people are putting retirement assets in bonds, stocks, and real estate investment trusts," Felts says.

Other vehicles that are rising in popularity due to low interest rates are strategic income funds, which are mutual funds that include mixes of fixed-income stocks and bonds, he says.

Moulton says annuities also are an alternative for providing income. An annuity is a contract that has some aspects of an insurance policy and an investment. Annuities are designed to provide the purchaser income payments at regular intervals.

Felts adds that return rates on annuities generally haven't fallen as far as interest on cash deposits.

Moulton cautions against investing in long-term bonds simply to get a higher rate of return than a bank account.

"We see a lot of people buying very long-term bonds to try to get higher rates of return," he says. "If inflation kicks in, interest rates also will rise and bond funds they've reached for to get more yield are really going to take a beating."

Moulton says he doubts interest rates will get any lower, and he expects the inflation rate to tick upward.

"They can only go up," he says. "We're positioning portfolios for inflation with shorter-term bonds, so they don't take as much of a hit."

In order to earn more than the prevailing interest rates, Moulton advises most clients to keep a balanced portfolio that includes some exposure to the stock market.

The firm's clients, most of whom are retirees, aren't the type to bet entirely on the stock market, though, he says.

"With everything going on in the world, they are gun-shy," he says. "People we've been dealing with have not been coming in to load up on equities."

Felts also says clients generally are cautious about investing in stocks.

"Because the stock market dipped in value and even though it has recovered a fair amount, they are scared it's going to happen again," he says. "On the other side, if they go to everything that's guaranteed and insured, they just aren't going to get anywhere."