While inflation may be the talk of the town, higher interest rates typically find their way into the conversation. We’ve watched the Fed raise interstate rates this year, changing the spending habits of many Americans. The result isn’t just higher rates on mortgages or auto loans, the outcome is a shrinking economy as borrowing money becomes harder and spending decreases.
If you’ve been keeping up with our blog, you’ve heard us say that inflation is ultimately too many dollars chasing too few goods. We’ve seen empty shelves, limited inventory across various business sectors, or received backorder notices when shopping online. As interest rates rise and spending habits shift, people are spending less, which is expected to counteract inflation over time. Current signs of this include supply chain improvements and a shift in the real estate market.
Take a quick look back in history and you’ll see many examples within your lifetime where the Federal Government has intervened to rein in inflation or boost an economy. But it’s not all negative, those with a growth mindset and good financial sense know they can benefit from rising rates.
Are High Interest Rates Good for Retirees?
The good — when it comes to rising interest rates
You’ve likely received a notice of rising interest rates on your high-yield savings account. This may be your emergency fund or a place you save for upcoming purchases so you don’t have to dip into your retirement fund.
This is good news, while many don’t keep enough in their savings account to see a truly impactful difference, we’ll welcome the extra dollars deposited into our accounts each month. A savings account is a safe way to hold onto money with a guaranteed rate of return — more importantly, most appreciate knowing the value of their savings isn’t subject to downward fluctuations.
Along those same lines, we find bonds and CDs. While there may be fees or repercussions for cashing out early, if you leave your money in a government-backed savings bond or certificate of deposit until the maturity date, you are guaranteed a return on your investment. And just like savings accounts, the interest rates are rising, meaning more money in your pocket when you cash out your investment.
The less desirable side of rising interest rates
When interest rates rise, it’s harder to borrow money. When it’s harder to borrow money, the nation as a whole spends less. This puts the stock market on a downward trend. While it’s not enjoyable, experts will tell you it was inevitable.
Thanks to the cyclical nature of the stock market, the story doesn’t end there. While the actions of the Federal Government in raising interest rates put a damper on the economy, history shows these actions will help our economy get back on track in a more favorable manner, meaning a rebound is expected to follow. Of course, every financial professional wishes they had a crystal ball to give us a glimpse into the exact timeline.
Retirees who have taken a pension payout are also feeling a bit of pain. The thought process can be a bit counterintuitive, but it comes down to the calculation your employer uses to compute your payout. “In simple terms, the higher the rate used to calculate a lump sum — to make it actuarially equivalent to the annuity — the smaller your payout.” Unfortunately, this is a side-effect of many pensions being subject to inflation erosion.
Taking Advantage of Higher Interest Rates
Retirees often have an advantage when interest rates rise. Because you’ve diligently saved, you often have substantially more buying power compared to younger investors and buyers if you don’t need to rely on financing options. Real estate is a prime example of where cash is king and can quickly put you on top when in competition with other buyers.
We already touched on savings bonds, but Series I Savings Bonds are worth mentioning again. I Bonds are purchased directly from www.treasurydirect.gov and they are noteworthy during times of rising interest rates because the current interest rate is just under 7% (subject to change, based on Feb 2023). While many savings accounts are happy to see interest rates in the 2% range, I Bonds provide a much higher rate of return.
While we’re certainly not suggesting you invest your life savings into I Bonds, they are a great form of diversification for your portfolio when you’re looking to overcome volatility in the securities market. Paying cash instead of relying on financing and putting your cash to work for you where interest rates are rising are two simple ways you can take advantage of higher interest rates.
Our Philosophy When Managing the Money of Retirees
At Integrated Wealth Management, we adhere to an evidence-based investment strategy that is grounded in decades of Nobel Prize-winning research. We ignore media and Wall Street noise and instead rely on time-tested principles and a disciplined, long-term approach to achieving your goals. We build investment portfolios adhering to the following principles:
Investment portfolios and financial plans must align. Investment recommendations are based on your goals.
Long-term focus. Market timing does not work. We focus on maximizing returns over time.
Disciplined investing. A clearly defined investment strategy can help guide you through market ups and downs without resorting to emotionally charged reactions.
Tax-efficient consideration. Proactive tax planning is key. Asset location and tax loss/gain harvesting are considered to reduce taxes and maximize returns.
Ongoing risk reduction. We rebalance portfolios to take advantage of “buy low, sell high” opportunities.
Efficient portfolio management. We strive to execute trades efficiently and select low-cost investments to keep expenses low.
By sticking to our philosophy and relying on history as an indicator of the future, we’re able to remove much of the emotion many retirees are experiencing today. If you have questions about protecting your nest egg, reach out to our financial planners today for an honest review of your financial standings and a helping hand that will lead you through the retirement process.
About Integrated Wealth Management
Integrated Wealth Management is owned by Burt Hutchinson, CPA, CFP®. On his team, he has Carol Wasko, CPA, CFP®, and Kaitlyn Hartman, FPQP™. We’re a CPA-led organization, meaning we’re here to handle your complex tax scenarios and provide cost-saving insight related to your financial plan.
We’re here to guide you through the 3 stages of retirement:
Uncertainty Stage: When you are within 10 years of retirement and have questions about how to make it work
Stability Stage: When you have reached the financial milestone to retire comfortably and confidently
Reflection Stage: When you are looking to leave a legacy
We are also here to provide experienced, empathetic support during times of loss, such as the death of a life partner. You need confidence and a sense of security to enjoy retirement. As fiduciaries with a fee-only structure, we never receive commissions. Free of ulterior motives, you can be sure we’re focused on your goals.
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Disclosure Statement:
This presentation is not an offer or a solicitation to buy or sell securities. The information contained in this presentation has been compiled from third-party sources and is believed to be reliable; however, its accuracy is not guaranteed and should not be relied upon in any way whatsoever. This presentation may not be construed as investment, tax, or legal advice and does not give investment recommendations. Any opinion included in this report constitutes our judgment as of the date of this report and is subject to change without notice.
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, Past performance is not a guarantee of future results.
Diversification and asset allocation do not ensure a profit or guarantee against loss.