Why higher interest rates may be good news for retirees...
It's a great time to be a debt-free retiree or someone nearing retirement.
Even if you still have a mortgage, chances are you locked in an ultra-low interest rate before rates increased a few years ago.
The New York Times recently reported that a key interest rate has climbed to its highest level of President Trump's second term.
Just a few months ago, many people expected rates to come down. Since then, renewed inflation concerns have caused many economists to believe rates could remain elevated for longer.
What do debt-free retirees sometimes have? Discretionary savings.
Higher interest rates generally mean that conservative investments may offer more attractive yields than they did just a few years ago.
U.S. Treasury securities are often considered the closest thing to a "risk-free" investment because they are backed by the U.S. government. Today, the 10-year Treasury note is yielding around 4.7%, which is a noticeable difference from the period before the pandemic when it was often below 1.5%.
But What About Inflation?
You may be saying, "Slow down, David! Inflation is still out of control. Have you been to the grocery store lately?"
I try my best to stay out of the grocery store because I'm in a perpetual state of hunger. I shop with my stomach. Mallory, my wife, is much more disciplined when it comes to grocery shopping.
It's true that inflation can slowly erode purchasing power. That's one reason we often discuss stock market investments when talking about long-term retirement planning.
Historically, stocks have provided growth that has helped many investors keep pace with inflation over long periods, although there are no guarantees.
Why the Stock Market Still Matters
Even for companies that aren't publicly traded, it's helpful to watch what publicly traded companies are doing.
Recently, I spoke with a gentleman who manages several fast-food restaurants. When evaluating how his stores are performing, he compares his results to publicly traded restaurant companies. If his business is significantly underperforming similar companies, he knows it's time to ask why.
Investors can think about the stock market in a similar way. It gives us insight into how businesses and often the broader economy are performing.
Think Long Term
Ideally, we encourage clients to think of their stock market investments as money they won't need for at least the next ten years.
As Warren Buffett famously said:
"If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes."
At this point you might be thinking, "David, I'm saving this money so I can use it in retirement and not let it sit untouched for the next ten years."
That's a fair question.
Why Today's Environment Creates More Choices
One advantage of today's higher interest-rate environment is that retirees often have more planning options than they did just a few years ago.
For many retirees, today's interest-rate environment allows us to consider allocating a meaningful portion of a portfolio to investments designed to provide greater stability and income, while allowing another portion to remain invested for long-term growth. The objective isn't to eliminate market risk altogether but to match each dollar to its purpose. Money needed for income in the near term may be invested differently than money intended to help fight inflation over the next decade or longer.
There isn't a one-size-fits-all solution, but higher interest rates have expanded the number of tools available when building a retirement income plan.
Until next week,
David C. Treece,
Financial Planner
Clients Excel Blog
