Recent financial news pages are full of stories about rising interest rates. At the end of July, the Federal Reserve announced a 0.75-percentage-point hike in interest rates. This was the latest in a series of rate increases that started in March 2022. The Fed has been raising interest rates in an attempt to combat inflation, and rates may continue to go up until the Consumer Price Index drops.
What do interest rate hikes mean for your retirement? The answer is complicated. There are some types of investments that benefit from higher interest rates. Conversely, higher interest rates generally slow economic growth, which can hurt other types of investments.
The Pros: Better Returns on Bonds … Eventually
Higher interest rates mean higher returns on bonds. This is great news if your investment portfolio includes bonds because you can count on a better return … eventually.
Bonds tend to be seen as boring investments, but they’re an important part of a well-rounded plan for this very reason. When high interest rates affect other types of investments, better bond returns can balance out those losses.
The problem many bondholders have now is their current bond values are declining with rising interest rates. As the interest rates continue to fluctuate, having a strong bond strategy and portfolio will help you navigate this challenging environment.
There’s another way you can benefit from higher interest rates: keeping money in a savings account. If you have money in a savings account, especially an HYSA (high-yield savings account), you’ve probably noticed a positive change in your monthly statements. Higher interest rates on your savings account mean better yields each month.
The Cons: Slow Economic Growth
The downside of higher interest rates is that they tend to hurt most other types of investments, particularly stocks. The idea behind raising interest rates is that it can help slow down inflation by putting a damper on the market.
But slower economic growth usually leads to challenging market conditions. So if you have a lot of your retirement funds tied up in the stock market, you will probably see a decline or potentially a slower growth rate in the value of those investments.
Interest Rates and Loans
Interest rate changes can affect your debt as well. If you are considering taking out a loan, especially a large one like a mortgage, higher interest rates will negatively impact you. If you already have a loan with a relatively low interest rate, however, you are insulated from the rising interest rates with your locked in rate.
Of course, it’s always important to remember that your life should drive your financial plan instead of making decisions exclusively based on interest rates.
Build a Recession-Proof Retirement Plan
Rising interest rates, inflation, and market volatility can be frightening for investors. However, retirees are generally better prepared for these conditions than younger investors, especially retirees with well-rounded investment plans. If your retirement account includes a diverse range of investments such as stocks and bonds, you can feel confident that your funds will remain relatively stable no matter which way the market goes.
Do you know if your retirement plan is well-rounded? What are the best steps to take if you aren’t sure whether you have a good balance of varied investments? If you’re not confident you have a sound retirement plan, we can help.
At Guiding Wealth, we’re here to help you prepare for retirement and build a strong investment plan that’s ready for anything. A Certified Financial Planner™ can provide expert guidance, whether you’re just starting to invest or you’re ready to retire in the next couple of years. Contact us online to schedule a consultation, or call us at 214-810-3835.