Here's What the Fed's New Interest Rate Plan Means for Your Retirement Savings
The Federal Reserve's new interest rate policy could be a blessing or a curse for your retirement savings, according to MarketWatch.
The Fed announced a new policy on Thursday, stating that the central bank plans to keep interest rates low for the foreseeable future. The Fed aims to keep inflation around 2 percent to help the economy grow, but now the central bank will allow inflation moderately above 2 percent. This would lead to the Fed not increasing interest rates as frequently.
Almost a year ago, the Federal Reserve cut interest rates to less than 2 percent. Earlier this year, the Fed cut interest rates to around 1 percent before ultimately cutting them close to 0 percent in the midst of the pandemic. Lower interest rates are good for borrowers with credit card debt and mortgages but can have negative effects on retirement savings.
“The Fed policy makes it crystal clear that we should expect low-interest rates for years,” said Larry Luxenberg, principal at Lexington Avenue Capital Management. “Truly safe investments won’t yield much.” Low-interest rates can stunt the growth of certain investments. This issue becomes more relevant as individuals approach retirement and restructure their portfolios to become more conservative.
Conservative portfolios typically have higher bond allocations since it is considered a "safer asset" than equities. Low-interest rates decrease the returns on safe assets. Eric Walters, managing partner and founder of Summit Hill Wealth said, “as a result, they need to review their plans for retirement using lower return assumptions.” Retirement forecasting typically uses historical returns of 4-5 percent for bonds, but “using these assumptions now for a retirement plan could be disastrous when actual interest rates for 10-year Treasurys are 0.74%,” he said.
Furthermore, low-interest rates hurt returns from certificates of deposit and other cash-equivalent accounts. However, Jennifer Weber wants to ease worries for individuals in their 60s. She points out that many people are living longer and healthier lives which allows them to work into their 60s and 70s. According to accrual tables, “a person who is 65 and in good health still has decades to live,” Weber said. “This individual should have a reasonable amount in the stock market (assuming he/she has enough in savings) since the stock market tends to do well in a low-interest rate environment.”
However, those closer to retiring may want to speak with a financial professional to discuss alternatives investments such as riskier equities. “This potentially creates greater exposure in the stock market and risk for investors that may have previously used safer bonds to subsidize retirement income needs,” said Michelle Buonincontri, a financial adviser with “Being Mindful in Divorce.”
“Retirees need to prepare a financial plan with lower projected returns for equities,” Walters said. “By using lower projected returns for bonds and equities, retirees can work to avoid running out of money and need to ask for help from their kids or trying to go back to work.”