In December, the Fed increased interest rates for the first time since mid-2006. We know that the realities of the 2008 financial crisis led the banking system to lower the rate to zero during its height, and remain there for nearly seven years as America’s economy recovered. During that time, however, savers have been on the short end of the stick. Retirees, especially, saw much lower returns and higher risks than imagined, causing discontent even with news of recovery and a thriving economy in the backdrop.
Now, as the Fed is expected to gradually increase rates in the coming months, claims of recovery appear more realistic than ever. First, one must understand that the Fed’s decision to hike up interest serve as a balance to consumer spending and aid in curbing inflation. By doing so, the bank increases the cost of capital, making it more expensive to get things like loans and purchase cars and similarly large items. As a result, the rate at which most people do so decreases, which may seem like the antithesis of how the economy should work, but it is effective.
Naturally, many have questions about just how effective it could be, and how higher interest directly affects their personal lifestyles. The answer is, it depends. As with most situations pertaining to finances, there are no absolutes; however, there are a few things retirees can expect as a result of this move which are promising.
- Better Returns for Savers:
Saving makes more sense (and more cents) as interest rates climb. Investing in CDs over savings accounts typically generates more income at a fixed rate, depending on the terms. This wouldn’t be as significant in a near-zero interest situation, but with recent hikes, this is a smart financial decision with low-risk and more money for the future. Shop around for the best deals or consult with your financial advisor for assistance.
- Increased Portfolio Options:
Many have chosen to fill portfolios with stocks because of a greater chance for return. But in higher interest situations, bonds can be a great asset, and are less prone to risk than stocks. Now, that doesn’t mean that current bonds won’t be affected. Longer-dated bonds will lose value as yields and interest move in opposite directions. However, buying shorter maturities is a great defense, and a trend more people are moving toward.
By that same measure, stocks can be beneficial for those who are more conservative. As I mentioned previously, the Fed’s actions are a sign that the economy is progressing in the right direction. Kira Brecht at U.S. News suggests that
sectors like banking, energy, and technology are the best options in this type of situation. It’s worth consideration.
- More Money From Annuities:
Annuities have been steadily declining due to low interest rates. According to the Secure Retirement Institute, sales fell 5% in the first half of 2015, in comparison to the year prior. To put that in perspective, sales rose more than 10% in 2006 but only a paltry 3.8% in 2014. However, that could change. Fixed rate annuities could provide a steady source of income and security in the event that rates drop again. Purchasing from different companies at different times provides an extra cushion in that all of your eggs won’t be in a basket that could be shattered should a company collapse or fall victim to bankruptcy.
Despite these benefits, one could experience adverse effects of hikes in other areas. Credit card users and those considering refinancing their homes may not have much reason to smile. However, gradual shifts provide a time to plan and strategize in ways that make the most sense for your future. If you haven’t already, you should start thinking about how to take advantage of the benefits of this once in a decade moment.