Interest rates are a big deal when you’re buying a home or getting a loan, but they don’t just affect your ability to purchase things—they also impact your postretirement income as well as the value of the assets you own.
Over the past several years, interest rates have been extremely low—so low, the only way they can go in the future is up. That makes it vital that you understand the impact these numbers have on your retirement so you can prepare yourself.
Rising Interest Rates Hurt the Bonds You’re Holding
The bonds you currently own have coupon rates influenced by the Fed rates at the time they were issued. When interest rates rise, new bond issues will have a higher interest rates than the bonds you own, which means you’ll be earning less interest than you could on a new issue. And if you decide to sell the bonds in your portfolio, you may have to sell them at a discount so the yield is competitive with new issues.
Rising Interest Rates Help Your Savings
If you have money in a regular savings account, you’ll see your interest earnings rise along with the prime rate. CD rates will rise too, but if you’re locked in to a low-rate CD, that will actually work against you. One way to guard against this is to have a CD ladder, which consists of breaking your savings up into many different CDs with varying interest rates and maturity terms so that some of them mature as interest rates rise and you can re-invest them into a higher-rate CD.
Rising Interest Rates Can Help Your Universal Life Policy
As interest rates rise, premiums on universal life insurance policies will often fall and cash values will grow more rapidly. Whole life insurance policy cash values may also grow quicker, but these rates aren’t adjusted as often as universal rates, so the growth may not be as aggressive.
Between interest rates, investment volatility and inflation, seniors have a lot to carefully monitor during their retirement years. But knowledge is power, so taking the time to understand how various factors affect your investments is the first step in preparing yourself to deal with the potential fallout.