Rising Interest Rates and What They Mean for Your Retirement
For the first time in nearly a decade, interest rates are on the rise. The Federal Open Market Committee has raised the federal funds rate three times this year, with the most recent increase taking the rate to 2.25 percent.1 There have been eight increases since December 2015. From 2009 to 2015, the Federal Reserve kept rates at or near zero as the economy recovered from the financial crisis.
Fed Chairman Jerome Powell has suggested more rate increases could be coming soon. He recently said that current rates aren’t close to neutral, which is the rate considered appropriate for current economic conditions. The Fed’s own outlook indicated the neutral rate could be anywhere from 3 percent to 3.4 percent.2
The federal funds rate is the rate banks use for overnight lending to other institutions. It influences nearly every instrument that uses interest, such as savings accounts, certificates of deposit, credit cards, loans and more. As you might imagine, an increase in the federal funds rate generally leads to an increase in overall interest rates.
If you’re retired or approaching retirement, you may be concerned about what higher interest rates mean for your retirement. Should you change your strategy? Will increased interest rates lead to market declines? How will increased rates affect your outstanding debt? Below are a few things to consider as you review your investment strategy and your financial plan:
Savings and deposit rates may increase.
If you’re a saver, you’ve likely been dealing with low interest rates for some time. For almost a decade, banks have offered little to no interest on savings accounts and minimal interest on certificates of deposit. That could change. An increase in the federal funds rate usually leads to increased rates elsewhere, especially at banks and other financial institutions.
While you may not see an increase in rates overnight, it’s worthwhile to shop around before you open your next savings account or CD. You may see banks being more competitive in their efforts to attract new deposits.
Also, if you’re looking for a secure vehicle with a fixed interest rate, talk to your financial professional about a deferred fixed annuity. They offer tax-deferred growth along with competitive interest rates.
Adjustable rates on debt may increase, too.
Do you hold outstanding debt with an adjustable rate, such as credit cards or lines of credit? If so, now may be the time to pay down those balances. Adjustable rates often increase in line with increases to the federal funds rate. You could see your payments increase soon.
Also, if you’re looking to refinance your home or take out a mortgage for a new home, consider your timeline. Mortgage rate increases are often gradual and take time, but they do happen. An increased rate on your mortgage could lead to higher payments or reduced purchasing power.
The financial markets may see some fluctuation and volatility.
It’s nearly impossible to predict exactly how markets will be impacted in the short term. It’s never advisable to try to time the market or predict winners and losers from any kind of financial uncertainty. You may want to review your long-term strategy with your financial professional to make sure it’s still in alignment with your goals and needs. However, resist the urge to make substantial, abrupt changes to your plan.
Ready to review your investment strategy? Let’s talk about it. Contact us today at Ambrose Financial & Insurance Services. We can help you analyze your needs and develop a plan. Let’s connect soon and start the conversation.
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18155 – 2018/10/17