Say goodbye to a decade of rock-bottom interest rates — and
if you’re a retiree or soon-to-be retiree looking for investment income, that’s
But higher rates can also be a double-edged sword. If you
have debt, if you have an adjustable-rate mortgage that’s about to reset,
higher rates could sock you right in the wallet.
Here’s the background: the Federal Reserve has raised what’s
known as the “Federal Funds” rate for the second time this year, and signaled
that more hikes are coming in the second half of 2018. Banks and credit unions
typically tie those rates to rates they offer you on things like savings
accounts and certificates of deposit (CDs) — so a hike by the Fed typically
means good news for savers.
“This has been a long time coming,” says Rob Williams,
Denver-based director of income planning for Charles Schwab SCHW, -0.51% .
“Finally we’re seeing the (Fed’s) short-term interest rate rise, which has been
very helpful in increasing the return on cash and short-term investments. It’s
a great thing for retirees to be finally getting some return on their lower
One-year CDs, for example, are now yielding around 2.3%.
Hardly spectacular, but consider what they were paying just three years ago: a
minuscule 0.25% or so. Keep in mind though, that inflation is also rising, and
rising prices can cut into your purchasing power and erode your standard of
living. That’s why Williams calls these higher returns on CDs, money market and
savings accounts “ballast” — they offer liquidity, stability and will help keep
you afloat, but not much more than that.
The need for cash flow forced many Americans to take added
risks during the low-rate era. Williams says you may want to consider dialing
back that risk now.
“At this point, with interest rates rising, it behooves a
lot of retirees to look at the risks they’ve taken and making sure that they’re
holding investments they’ll be comfortable with — especially if we’re at the
peak end of this economic cycle,” he advises.
This suggests reducing your stockholdings, particularly amid
concerns that equities, which have made a huge run since 2009, may be due for a
pullback — perhaps even a sharp one. (Williams is careful to note that he’s not
making any predictions about the market’s direction.)
But here’s where things get tricky. We’ve suffered through
two monstrous stock market collapses in just a generation: between 2000-2002
and 2007-2009. Folks in their 50s or 60s who loaded up on stocks just before
those crashes saw their retirement dreams delayed, if not destroyed. After all,
the older you get, the less time there is to recover from a market wipeout.
And yet, if you’re looking at 20, even 30 years in
retirement, you’ve got to have exposure to stocks, because traditionally
they’ve offered the best long-term opportunity to stay ahead of inflation. The
government’s consumer-price index (CPI) might be low right now, running about
2% a year. But even 2% inflation over two decades will slash your purchasing
power by a third.
On top of that, the cost of some big ticket items — like
health care and housing — are growing faster than that. So here’s the dilemma:
How do you generate the kind of cash you need, without having too much exposure
There’s no one-size-fits-all answer here, Williams advises.
Your age, your personal situation, your tolerance for risk makes you unique —
talk it over with an adviser. But he does offer one bit of advice: Don’t
overlook municipal bonds. The new tax law might have made munis somewhat less
attractive relative to other opportunities, “but they are still very attractive
for investors who are above the 10-15% tax bracket.”
Tune out the media’s focus on municipals that are outliers
in terms of risk — Puerto Rico and Illinois, for example — and look at the
overall health of the muni market. “There are 20,000 or more issuers in the
municipal market and the credit quality and ability to pay for the vast
majority is still quite high.”
here for the original article from Market Watch.