Those in retirement and those nearing retirement need to factor interest rates into their investment decisions. To explain what the Fed hike might mean, Yahoo Finance talked to several wealth management advisers and finance professionals.
First off, it’s important to keep in mind that one quarter-point rate hike won’t drastically alter anyone’s fortunes.
“A single rate hike rarely helps or hurts a retiree outright,” said Michael Cochran, chief investment officer at BentOak Capital in Fort Worth, Texas. “It reshuffles the deck where there are benefits, but also some pressures.”
Better savings yields
A rate hike could be good news because it means that savings yields will likely rise, said LendingTree chief consumer finance analyst Matt Schulz.
“That helps your money grow faster and perhaps last longer, which is so important when you’re on a fixed income, as many retirees are,” he said.
If you’ll need cash savings to finance living expenses, you might be able to take advantage of adding more cash to low-risk, fixed-income investments, such as CDs, money market accounts, or high-yield savings accounts.
“For cash savings, such as money market accounts or short-term CDs, retirees would benefit as banks adjust their yields, said Maria Castillo Dominguez, a financial planner in Hollywood, Fla.
One easy way to do that is to take some of the profits from your equity holdings, which have been robust this year.
“When the Fed raises rates, banks typically respond by offering better yields on these products, which can translate to more income without taking on additional market risk,” Dominguez said.
High-yield savings accounts, money market funds, and newly issued CDs “all tend to nudge their rates slightly higher, so retirees keeping money on hand for short-term expenses get a very slight income bump,” Cochran said.
You might be able to take advantage of adding more cash to low-risk, fixed-income investments, such as CDs, money market accounts, or high-yield savings accounts. ·Jose Luis Raota via Getty Images
Fixed-income investors can benefit too. When an investor purchases new fixed-income issuances, they should enjoy a higher coupon than was available before the hike, he added.
“Reinvesting maturing bonds on a regular schedule ends up capturing higher yields over time, which can work to strengthen future income,” Cochran said.
Don’t expect changes to happen in a snap, though.
“When the Fed starts hiking, banks, and even online banks, generally don’t respond quickly,” said Ken Tumin, co-founder of DepositQuest.com. “For example, the last time the Fed started a hiking cycle on March 16, 2022, five major online banks increased their high-yield savings account rates on average by only .08% after six weeks.”
That said, Tumin expects money market mutual fund yields to respond the fastest. “Savers have already seen rates on new CDs increase in the last few months,” he added.
Several online banks had already responded to rising Treasury yields and increasing odds of Fed rate hikes by raising some of their CD rates before Wednesday.
“An increase in the federal funds rate may actually not spur many CD rate increases if it appears that there may not be a long series of Fed rate hikes,” Tumin added.
Stock market returns slip
While a Fed hike generally boosts cash yields for retirees, it can create turmoil in the stock market, where many retirees and near retirees have the bulk of their savings invested.
While some analysts expect only subtle changes that could squeeze on what has been a robust market over the last year or so, others are more concerned.
“We expect an 8-10% pullback in S&P with a potential second leg in December,” Dean Curnutt, CEO and founder of Macro Risk Advisors, wrote in a Monday note to clients, according to Bloomberg. Rate hikes will “compress margins in companies that cannot pass costs through,” as well as “deliver a volatility shock into a market that is not positioned for it,” he said.
The S&P 500 (^GSPC) has declined by an average of 4.0% over the six weeks following the first Fed rate hike of a cycle across seven such episodes since 1988, according to a new analysis from strategists at The Kobeissi Letter. Stocks recovered all of those losses over the next five to six weeks on average.
In the six months following the first interest rate hike, the S&P 500 returned 4% on average. After 12 months, the S&P 500’s average gain tallied 9%. Positive returns have occurred in every episode except 2022 over the 12 months.
Pricier debt
A higher fed rate can also be bad news because it means that the rate you pay on your credit card debt will likely rise too.
“That’s about the last thing retirees need,” LendingTree’s Schulz added.
The average credit card balance is $6,676 for Americans 62 to 80, according to Experian data.
For most people with credit card debt, the hike won’t add more than a couple of dollars to their monthly bill. “Still, with card rates already sky-high and inflation showing few signs of letting up, any increase is definitely unwelcome,”Schulz said.
Other debt gets more expensive too.
“Anyone carrying a HELOC, an adjustable-rate mortgage, or debt with a variable rate will likely notice their payments creep upward,” Cochran said.
“And then there’s housing. Higher rates tend to stymie demand, which could soften home values and [that] is not ideal timing for retirees who were counting on selling or downsizing. A slower market means longer waits and potentially lower offers, right when some retirees are trying to simplify their finances.”
Knocking inflation back
Keep in mind the bigger-picture case that warrants higher rates, and that is to calm inflation.
“The Fed raises rates specifically to cool spending and slow price growth, and that is important to someone on a fixed monthly income,” Cochran said. “Every point of inflation creates purchasing power risk, which is impactful for those on a fixed income.
“A slower rate of inflation, even if it takes months to show up, is a long-term win for retirees.”
