Two Ways Rising Rates Could Affect Your Retirement06-17-2014 |
Eight times a year, the U.S. Federal Reserve’s Open Market Committee (FOMC) meets to review the nation’s monetary policy and decide whether or not to change the federal funds rate, which is the rate at which banks and other depositary institutions lend money to each other. (See the meeting schedule at Money Morning.) This rate helps controls the supply of money. If the rate goes us, it becomes more expensive for banks to borrow, which filters down to the consumer level by making it harder for individuals to get loans.
The federal funds rate is currently at 0.25%, which is the Fed’s way of saying that they want banks to continue lending out money in order to stimulate economic growth. There is general agreement that the rate will be increased by the end of this year, if not sooner. When it happens, this shift in monetary policy could eventually have widespread consequences for the entire economic system, including for individual investors in or near retirement. Fortunately, there are a few things investors can do to get ready for a rising rate environment.
- What about refinancing your personal debt? If you’re about to enter your retirement years but still have debt to pay off, talk to your advisor about refinancing now at a low rate while you still can. Additionally, if you expect to borrow for any big expenses in the near future, you might want to act now to take advantage of cheaper debt. You’ll end up paying more in interest if you wait too long.
- What about your overall portfolio? Conventional wisdom holds that most investors shift more of their allocation to bonds as they age, limiting their exposure to potentially risky equities. But in a rising rate environment, equities tend to outperform bonds. Of course, this is not always true. But to get the maximum value out of their retirement portfolio, investors should talk with an advisor about holding on to more of their equities until interest rates stabilize again.
While the Fed’s moves to raise interest rates will certainly make news around the world, it doesn’t have to mean bad news for individual investors.