By contributor
updated 8/15/2011 7:37:24 AM ET 2011-08-15T11:37:24

The Fed last week guaranteed it would keep short-term interest rates at nearly zero for not just the foreseeable future, but the distant future, all the way through “at least” mid-2013.

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That's good news for consumers and companies that need to borrow money, for retirees or those hoping to leave the workforce soon, it's a gloomy picture.

Few seniors can afford to keep their savings in today's low-risk fixed-income products because rates on money market accounts and CDs, often under 1 percent, won't even keep up with inflation.

"It is historically unprecedented," said Anthony Webb, research economist at the Center for Retirement Research at Boston College. "If we go back to the 1930s, nominal interest rates were extremely low, but bear in mind in the 1930s prices were actually falling."

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Today's retirees are worried about inflation, for good reason. Although the June core consumer price index increased by only 0.3 percent, that number is deceiving because it doesn't take food or fuel into account; it also isn't weighted to reflect the disproportionate amount older Americans must spend on health care, a category in which prices are rising faster than the overall rate of inflation. Financial services company Raymond James uses a 3 percent inflation rate as its benchmark, based on historic averages going back to 1926.

Many older Americans focus too much on preserving their principal to the exclusion of making those funds earn more for them, Webb says. Solving this means taking on more risk.

"There's always some trade-off," said Stuart Armstrong, a financial planner with Centinel Financial Group in Needham Heights, Mass.

Here are three basic ways to increase returns without exposing yourself completely to the volatility of the stock market:

Dividend-paying stocks
Those with a decent tolerance for risk could invest some of the money they have in CDs or deposit accounts into a mutual fund of dividend-paying blue-chip stocks.

"The problem is emotionally not everybody can handle that kind of fluctuation," Armstrong said. "You still have to be willing to accept the underlying fluctuation of the principal."

Bond funds
If that's too scary, older Americans can invest in a bond mutual fund. Even with the worries about U.S. and European sovereign debt, a good fund manager will have taken steps to mitigate that by including a mix of corporate bonds along with government debt, Armstrong says. Your money won't have the growth potential it would in a stock-based mutual fund, but it also doesn't have the same degree of volatility.

Finally, older Americans can shift a chunk of their nest egg into an immediate annuity, a product sold by insurance companies that offers guaranteed lifetime income.

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"The major caveat is insurance companies base the payout on their own earnings, so the payout on immediate annuities is very low right now," Armstrong says.

For retirees leery of dropping a big chunk of their savings into this kind of vehicle, Armstrong suggests a strategy called "laddering," which allows investors to buy a series of smaller chunks over time. This provides some immediate income but leaves the investor with cash to invest more in the future when rates may be higher. Plus older investors get a higher payout.

There's no one right solution that will suit everyone, and Armstrong suggests that investors might want to try several of these options. The bottom line is that even in this gloomy economic climate, there still are options that don't involve postponing your retirement or re-entering the work force.

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