Rising interest rates and the Federal Reserve seem to be the topic on the news more often than not, but what does it mean for your retirement?
It is typical to panic whenever you hear the market or economy is changing. However, in the case of rising interest rates, you could be in a good position if you understand how interest rates affect your retirement.
Rising Interest Rates – How they Affect your Retirement Accounts
In an economy, like we have today with rising interest rates, there are certain steps you can take to maximize your retirement accounts.
- Save more money
With interest rates higher, it makes sense to put more away for retirement because it will grow faster. So whether you are investing in CDs, money market accounts, or bonds, you will see a greater return on your investment.
The more you save during high-interest rate periods, the more you will have for retirement, and the less ‘catch-up’ you will have to do later.
- Reconsider your portfolio
During periods of higher interest rates, it is a great time to reconsider your portfolio, especially if you are nearing retirement.
The closer you get to retirement, the less risk you can take. Higher interest rates make it easier to take advantage of more conservative investments, such as CDs, money markets, and bonds.
If you invest too much in equities, you put your retirement income at risk. During a time when you must rely on the income derived from your investments, you want assets with the least amount of risk possible.
- Do not overlook the benefits of CDs
You might not think CDs are an important part of your retirement plan, but they can be a great investment when interest rates are high.
CDs tie up your funds for a specific duration, which can be a long time if you are saving for retirement. The longer you can tie up your funds, the higher the interest rates you will earn.
Falling Interest Rates – What you Should Know
Does this mean you should change your investment strategy in a market of falling interest rates?
Typically, the answer is ‘no.’ A stable retirement plan keeps the same strategy for the long term. It requires a balance between aggressive and conservative investments that allows you to reach your goals and take some risks to reach them.
Of course, if interest rates fall dramatically, you might alter your plan slightly, focusing more on equities than on fixed-income assets, but in the long run, the assets usually balance themselves out.
Interest rates affect your retirement, but they are not the only factor. So, when considering interest rates in your retirement plan, you should look at the big picture.
Consider how long you have, your risk tolerance, and your overall retirement goals when determining the best retirement strategy. Interest rates are a contributing factor that, when high, gives good reason to increase your retirement savings. Overall, consider creating a strategy that allows for fluctuation in both aggressive and conservative investments to reach your retirement goals.