How Retirees Should Approach Interest Rate Hikes (futurityfirst.com)

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It’s difficult to predict whether or not interest rates will rise this year. If you’re retired and risk-averse, then you’re probably not living high on the hog from a savings standpoint. Did you know that the average savings yield in the first quarter of 2015 was a measly 0.09%? For someone in retirement, that won’t be enough income to live off of. Actually, for most retirees it wouldn’t even be enough to go out for a nice dinner once per year. According to Swiss Re (a Swiss insurance company), since 2008 approximately a half-trillion dollars has been lost in interest income due to low interest rates.

There haven’t been many solutions for savings-oriented retirees. The most common has been to work longer. This isn’t such a bad thing because it keeps the body and/or mind working, which can prolong life expectancy. Another positive is that these people have been building their eventual retirement savings a lot faster than they would through savings accumulation via a traditional savings account or certificate of deposit (CD). According to Bankrate.com, the average yield on 1-year CD is 0.27%, and the average yield on a 5-year CD is 0.86%. (For more, see: How to Prepare for Rising Interest Rates.)

Rewarded for Risk

There are two ways to look at this. One, it’s unfair for speculators to be rewarded when savers are being punished. Two, life isn’t fair, and as an investor, you need to invest based on current conditions. Many retirees have made fortunes over the past several years thanks to record-low interest rates. These low rates have led to cheap money and the fueling of top-line growth via debt throughout many industries. This, in turn, has led to an exceptional rise in stock prices. It should be pointed out that those “made fortunes” are often just a comeback from the hit taken during the Financial Crisis, but it’s still a positive.

Then there are those who aren’t quite as risky but have still been chasing yield in long-term bonds. The low interest rate environment has made this a profitable trade. Many people are worried that a hike in interest rates will end this era of easy money, but are interest rates really going to move higher? 

Future Environment

Unfortunately, it’s impossible to predict the future investing environment with pinpoint accuracy. On the other hand, logic can be applied to current economic conditions in order to determine the likelihood of future events.

The Federal Reserve “might” hike interest rates later this year. Why? Because Federal Reserve Chairwoman Janet Yellen has said it was likely. But the Federal Reserve has continuously stated that it’s likely to raise interest rates in the near future for years. By always saying that it will soon raise interest rates, it keeps people believing that the economy is on the right track, but without action, these are just words.

The reality is that subprime home loans are making a comeback, and they’re on a tear in the auto market. On top of that, student debt totals $1.2 trillion, government debt is north of $18 trillion, the labor force participation rate has been on a steady decline, healthcare costs have been rising, and wage growth is nothing more than a pipe dream. Additionally, all that cheap money that has led to debt-fueled growth across numerous industries will come to a halt.

If rates are hiked, it will be a minimal move. This will lead to an even more complicated investing environment. On one hand, interest rates will still be exceptionally low, which should lead to stocks and high-yield bonds performing well. On the other hand, it’s all about direction on Wall Street. If institutional investors see the first rate hike as a sign of things to come and more capital is allocated to cash, the panic could spread quickly. (For more, see: Managing Interest Rate Risk.)

Fortunately, there is a simple solution. If you’re worried about interest rate hikes, then move to short-term bonds. If you’re not retired yet and you want to maximize your retirement savings potential, there are some other ideas to consider.

Planning for Retirement

The number one rule is to always take advantage of a 401(k) match program offered by your employer. This is free money. If you don’t take advantage of this opportunity it would be like someone knocking on your door, offering you a bundle of cash and you slamming the door on their face.

Another rule is not to leave your job to enjoy early retirement. The one exception is health concerns. If healthy, you want to remain at that job until you can collect your maximum Social Security benefits. Thirdly, if you have contributed the maximum allowed to a Roth IRA ($5,500-$6,500 depending on your age), then you can contribute to a non-working spouse’s Roth IRA with your earnings.

The Bottom Line

Savers have been punished while speculators have been rewarded in recent years. However, savvy investors, or those with good money managers, know how to adjust accordingly based on current conditions. It’s very difficult to predict whether or not interest rates will rise this year. If you’re concerned, look into short-term bonds.

Moskowititz, Dan. “How Retirees Should Approach Interest Rate Hikes.” Web log post. Investopedia. N.p., n.d. Web. 26 June 2015.
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For more information, contact our Recruiting Manager Allie Vossoughi at allievossoughi@ffig.com & 602-314-7580, or Thomas Shultz, Managing Director  at thomasshultz@ffig.com & 602-314-7580, or Scottsdale Associate Managing Director Nancy Monaco at nancymonaco@ffig.com & 602-314-7580, or Scottsdale Associate Managing Investment Director Tom Bugbee at thomasbugbee@ffig.com & 602-314-7580.

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