Today, I’d like to START A NEW VIDEO SERIES on the topic of “Retirement and Falling Interest Rates?”
So, I recently received the following timely question:
My brother-in-law is in the lending business and he was discussing how great it is that rates are currently low and may fall further. I understand that falling rates may be good for his business of lending money. It means more people will want to borrow if rates are lower. However, what about the average person like me who isn’t looking to borrow money? I’m approaching retirement, have a decent nest egg, and I keep seeing my CD and money market yields fall. My question is whether I should be concerned with rates falling or as excited as my brother-in-law.
So, this question is timely, since many soon-to-be retirees are in the same predicament.
Just to back up a bit: For context, the federal funds rate, which is the rate to which your brother-in-law is referring, is the lending rate that banks use when they borrow money from one another. It impacts credit card rates, mortgages, car loans, savings account yields, the borrowing costs businesses pay, and more. In many ways, lower rates are positive for consumers.
However, many investors may not see falling rates as positive given some of the impacts you alluded to, namely lower yields on CDs and money market funds. Unfortunately, in order to compensate, many investors are tempted by options that promise higher yields and end up taking far more risk within their portfolios.
During every falling or low interest rate environment, I’ve noticed investors making the same mistakes and missing out on certain opportunities. Investors who are aware of the financial options available will be best equipped to get through this part of the interest rate cycle unscathed and potentially even improve their financial situation. Here are some points to consider.
First, DO refinance onerous debt: Lower interest rates make borrowing cheaper, so it may be a good time to refinance high‑interest debt such as mortgages, auto loans, or personal loans. This can significantly reduce monthly payments and the total interest paid over time. You can also consider consolidating multiple high‑interest debts, like credit card balances, into a single loan with a more favorable rate. This will save money while also simplifying payments. Falling rates often stimulate the housing market as well. If you’re thinking about buying a home, lower mortgage rates can increase affordability. Keep in mind that while lower mortgage rates may make monthly payments lower, they also tend to cause real estate prices to rise. Be sure to run the numbers so you are purchasing a home that is within your means.
Next, DO have exposure to stocks: Lower borrowing costs for businesses can increase economic growth and boost corporate earnings, which generally benefits the stock market. It’s important for all retirees to have proper exposure to the stock market. This is especially true when rates are falling, which may serve as a tailwind to this part of your portfolio.
In my next video, I will discuss investments to AVOID as a retiree when interest rates are low.