Interest rates are on the upswing for the first time in nearly a decade. At the Federal Reserve’s March meeting, the board voted to raise rates for the second time in four months. The first increase came at the board’s December meeting. Before these hikes, rates had held steady at historic lows since the financial crash in 2008.
If you’re a borrower, the historically low interest rates may have benefited you. Rates for loans tied to homes, cars and even businesses have been low for some time. If you’re a saver who keeps money in certificates of deposit, interest-bearing savings accounts or fixed income investments, the low interest rate environment of the past eight years may have been difficult.
It’s impossible to predict what will happen to interest rates going forward. They could continue to increase, or they could stay flat. However, the recent increases show the Fed is at least open to raising rates.
How will rising interest rates impact you? It depends on your unique needs and goals. In general, your long-term financial strategy should be based on your specific objectives, not short-term economic changes. Below are a few tips to keep in mind, however, if rates continue to increase:
If interest rates continue to increase, you may be tempted to move your interest-bearing assets. That’s especially true if you’re concerned about market volatility. However, just because something pays interest doesn’t mean it’s without risk. Keep a diversified portfolio and don’t err on the side of being too conservative.
Remember, your retirement could last decades. A diversified balance of different types of assets and investments can help you achieve the growth you need to fund your retirement while also helping you manage your risk exposure.
Guaranteed income is a valuable resource in retirement. Many retirees count only Social Security and possibly a pension as income sources that are guaranteed for life. You may want to look at tools that can provide guaranteed income and also offer the ability to participate in rising interest rates.
A fixed annuity is one such example. In many fixed annuities, you’re offered a guaranteed interest rate for a set period of time. After that period is over, your interest rate renews based on a number of factors, including prevailing interest rates at that time.
When you’re ready to take income, you have a couple of options. You can either take the interest as a payment, or you can annuitize the compounded balance and create a guaranteed income stream for yourself.
There are many different types of annuities, and each is meant for a specific goal or objective. A financial professional can help you analyze your goals and needs, and then determine whether an annuity would be helpful for you.
Inflation may not be as noticeable as other risks such as market volatility or medical costs. It’s been modest in recent years, and sometimes there’s a perception that a small amount of inflation doesn’t pose a threat.
However, even a modest level of inflation can be dangerous if it compounds over many years. Consider that even 3 percent annual inflation over a 24-year period would lead to a doubling of prices. It’s possible your retirement could last 24 years or more. Could you afford to see your expenses double in that period?
Rising interest rates can sometimes fuel inflation. While the relationship between inflation and interest rates is complex, there’s been a correlation between the two in the past. You can manage the threat of inflation by staying diversified and using an investment strategy that offers upside potential.
Do you have a strategy for rising interest rates? Let’s talk about it. Contact us at Sprouse Financial Group. We can help you analyze your needs and develop a strategy. Let’s connect soon and start the conversation.
*Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values.
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