Recently, the Federal Reserve raised the base interest rate (or the amount it charges member banks to borrow money) by 0.25%, bringing it to a range between 0.25% and 0.50%.
And, after more than three years of no movement on rates, the Fed also indicated it expects six additional rate hikes in 2022.
The Fed raises rates only if and when it feels the U.S. economy is well-positioned to handle it, and all signs point to a continued recovery from the COVID-19 pandemic: unemployment is returning to pre-pandemic conditions and the housing market is still hot (despite the rising cost of mortgages).
Savers Rejoice, Spenders Despair
If you’re a retiree or a saver, the good news is that you’ll probably stand to benefit from rate hikes. That’s because interest earned on short-term investments, such as certificates of deposit and savings accounts, gets a boost when rates rise.
The bad news? When interest rates rise, borrowing costs also increase. More older Americans are carrying higher levels of debt: according to recent research, 67% of retirees reported credit-card balances.
Credit card debt is highly rate-sensitive, so you will feel an immediate impact if you’re carrying a balance. This means that now is the time to pay down that debt!
Bond Market Math
Many older investors have a significant portion of their portfolios in bonds or bond funds. Rising interest rates impact these investments, too. The prices of existing bonds fall as interest rates rise, because new bonds offer better rates than older bonds.
Wondering what the most appropriate bond holdings in this rising-rate environment are for your portfolio? Afraid that inflation will eat away at your investment earnings? Click here to schedule a free consultation with one of our advisors.