Interest Rate Risk for Retirees

The Interest Rate Risk for Today’s Retirees

Finally, your Golden Years. You’ve saved and planned and have your sights set on a long and active retirement. Well, not so fast. In order to keep your nest egg safe there are a few things you’ll need to know about the interest rate risks that could affect your intentions.

Some financial experts are cautioning against investment products that carry high risk without a strong return. The advice is based on the pattern of falling interest rates in the country. Over a 50-year history the pattern is evident, give or take a few rises that were only short-term.

Lower interest rates affect retirement income because of the lower the growth rates for retirement assets. To recoup the lower earnings, retirees may need to save more, reconsider their investments, or rethink their retirement plans altogether.

However, here are two risks to avoid:

1. Stock Market Risk

If you require a lot of stability regarding your retirement income, don’t put invest heavily in the stock market. The losses investors can incur may not be successfully offset by the gains.

Even when the price-earnings ratio (the price tag of the stock) is low, you might not have enough income to reinvest, even with the conventional wisdom of cheaper stocks performing better over time.

The end result, stock market losses can seriously impact your retirement savings in a negative way.

2. Long-Term Bonds

Bonds held for the long term don’t often perform better than face value. The longer the bond is kept, the more likely it is to respond to rising interest rates. Market interest rates rise and all bond values fall.

A better option would be to shorten the term of the bond (three years or less) or change to a certificate of deposit.

3. Relying on Annuities

Annuities are easy to obtain (many people just get them from their insurance agent) and are often purchased post-retirement, meaning they’re not a stable component of the overall savings agenda. And even though the insurer bears the risk of losses in the market, as well as the buyer’s longevity, the costs outweigh the value.

The fees are high and over time will add up. Don’t be fooled by the accessibility and ease.

Fluctuations in your income are challenging enough when you’re still working. But as time goes on, you’re less likely to want to rejoin the workforce – even if you could. So, your overall retirement savings plan should include as much stability as your personal situation requires. And factor in emergencies.

Sometimes people overlook the value of small-gaining options, such as savings accounts, certificates of deposit, or a money market account. Aside from being products with interest rates that don’t dip (or dive) they give you access to cash.

Even with a certificate of deposit, you can open a few different CDs with different maturity dates (called CD Laddering). This way every four – to –six months or so (given when you open each of them), you’ll have the ability to withdraw the funds without a penalty.

If you’re an uneasy investor, these options might be best for you. And as your retirement goes on, you might see the benefit of changing some of your other investments to give you more access to cash.