The Impact of Changing Interest Rates on Retirement Planning
Imagine you’re preparing for your retirement, anticipating enjoying the fruits of your labor. Then, you notice interest rates changing and fret about its impact on your savings and investments. Understanding these changes is crucial for maintaining the health of your finances.
Monitoring trends in the economy enables you to make smart choices and navigate transitions wisely. Rising and falling interest rates can impact several aspects of planning for your retirement, such as investment performance and the cost of borrowing.
Impact of Rising Interest Rates
Rising rates help savers but can hurt investors. Let’s take a closer look.
Impact on Fixed Income Investments
When interest rates rise, existing bonds become less valuable since new ones yield a larger return. However, when older ones mature, rolling them over at increasingly larger yields can boost earnings. Spread out fixed-income investments with a portfolio of maturities to counteract risk. Even retirees can ladder investments in bonds to enable them to earn successively larger yields over time and enjoy a steady earnings flow.
Impact on Variable-Rate Debt
Variable-rate loans, such as mortgages and home equity lines of credit (HELOCs), become costly when rates rise. If you have a fixed income, these expenses can eat into your budget. Securing a lock on a fixed-rate loan when rates are still low can mean financial security. Repaying variable-rate debt in full when a big jump in rates is predicted may ease your financial burden.
Impact on Inflation
Higher rates help to tame inflation, in which your purchasing power suffers as the costs of goods and services rise. They do so by making it more expensive to borrow, which eventually puts a damper on new spending. Retirees on a fixed income should budget for additional expenses by realigning their investment portfolios towards inflation-indexed investments. Having a portfolio of investments focused on growth may counteract inflation.
Impact on Annuities
Annuities can be affected by inflation, and fixed annuities may not keep pace with rising costs. This can erode the purchasing power of your payments over time. It is essential to consider inflation’s impact when choosing an annuity and to explore options that may offer some protection against rising prices.
How Falling Interest Rates Affected Retirement Planning
Falling rates make current bonds worth more, but new investments with high yields become expensive. Retirees must sometimes seek dividend stocks for a reliable source of income. A decline in bond yields can make investors switch towards alternative sources of fixed income, such as preferred stocks or high-returning corporation stocks and corporation bonds. Falling interest rates can also support the market as a whole, which can boost the equity portion of a portfolio. Often, small and mid-cap companies end up being the biggest beneficiaries.
Lower interest rates reduce savings and CD yields. High-yield savings and money market funds can mitigate reduced earnings if you balance your portfolio correctly. Alternative earning assets, including real estate trusts (REITs) and annuities, provide financial options when savings account yields drop.
Declining rates make borrowing and refinancing less expensive, helping you with big-ticket purchases without dipping into savings. Homeowners can save through refinancing a mortgage, thereby reducing monthly payments and freeing up cash.
Strategies for Handling Fluctuating Interest Rates in Retirement
You can use diversification, rebalancing, and inflation management to handle changes in interest rates.
Diversification
Spreading investments over many asset classes lessens risk and partially shields you from interest rate volatility. Breakwater Capital Group helps Denver wealth management clients position themselves for a variety of market scenarios. A portfolio with a mix of stocks, bonds, and alternative investments can provide stability and growth regardless of interest rate fluctuations.
Rebalancing
Regularly adjusting your portfolio keeps your portfolio in harmony with your retirement goals. Rebalancing helps you sell successful investments and re-invest in industries that may have a brighter long-term outlook. Breakwater is an experienced financial advisor firm in Denver. Let our professionals help you maintain a balanced portfolio.
Inflation Planning
Investments like Treasury Inflation-Protected Securities (TIPS) maintain purchasing power. We invite customers looking for financial planning in Massachusetts and wealth management in MA for inflation-related dangers to use our services. Other strategies, such as including real assets such as real property or commodities, can serve as inflation hedges in a diversified portfolio.
Consider Professional Advice
A financial advisor can help you manage fluctuations in interest rates. If you prefer a fee-only financial advisor in Denver, Breakwater Capital Group stands ready to serve. With us as your seasoned advisor, you can plan for changing interest rate trends and diversify your earnings sources.
Interest rates shape your future in your retirement years. Staying informed and adjusting your investments can help make your future more secure. Working with an experienced financial advisor assists you with staying on track. With wise planning, professional guidance, and age-based transitions, economic security is possible despite changing interest rates. If you have questions or need help with retirement planning, contact Breakwater Capital Group today. Our goal is to help you make your financial future more secure.
The views expressed represent the opinions of Breakwater Capital Group as of the date noted and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person. The information contained has been compiled from sources deemed reliable, yet accuracy is not guaranteed.Additional information, including management fees and expenses, is provided on our Form ADV Part 2 available upon request or at the SEC’s Investment Adviser Public Disclosure website, www.adviserinfo.sec.gov. Past performance is not a guarantee of future results.
