What Do Rising Rates Mean for Retirees?

Posted on: February 6th, 2019

Interest rates are on the rise, and the Federal Reserve (often referred to as “the Fed”) may continue gradually raising interest rates in response to a growing economy and strong labor market. Retirees may wonder how rising rates will affect their finances going forward.

Higher Cost of Borrowing

Retirees who have credit card debt or other adjustable-rate loans may feel the sting of higher rates, especially those living on a fixed income. Borrowing money is expensive in a rising rate environment, so it makes sense to focus on reducing high-rate debt, even if that means diverting money from savings or investments to pay down debt.

For retirees who aren’t affected by fluctuating loan rates, the big question is, “How will rising rates affect my retirement nest egg?”

Each Asset Class Reacts Differently

When rates start to rise, investors will be affected differently depending on the makeup of their portfolios. Consider the potential impact of rising rates on three primary asset classes — cash equivalents, bonds and stocks.

Cash equivalents. When the Fed raises rates, yields will rise on Treasury bills, CDs and other interest-earning accounts. Retirees with short investing timelines often rely on these vehicles to keep their nest eggs safe as they spend them down. After several years of abysmally low rates, investors are finally enjoying a boost with higher rates on savings accounts, money market accounts and CDs.

Bonds. A bond is basically an IOU issued by a corporate or government entity – a promise to repay the principal along with interest by a stated date. As bond issuers are forced to keep pace with the market and offer higher interest rates in order to find buyers, the existing pool of bonds, which were issued at lower rates, loses value. Bond prices will likely fall when interest rates rise.

Stocks. Rising interest rates can stir up volatility in the stock market, but it’s not necessarily a bad sign. Historically, stocks have performed relatively well during periods of rising rates. In the past 50 years, the market returns were positive in 10 of 11 periods when the Fed raised rates.* When the Fed raises rates, it’s because they believe economic growth is strong enough to withstand the increases. Whenever there are significant changes in the market (or in your life), it’s a good idea to revisit your asset allocation to make sure you’re on track with your goals.

Want to know more about the potential impacts of rising interest rates and what you can do to position your portfolio appropriately? Your Client Advisor would be happy to review your portfolio with you.

* Source: Vanguard. Rising rates have not meant poor stock returns. Sept. 19, 2018. Past performance is no guarantee of future results.

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