As we take in the view from the summit of Mount Interest, now is a good time to catch our breath and consider the new perspective at the peak (we hope!) of five percent. Maybe “Mount Interest” isn’t what everyone is calling the nine rate hikes by The Fed over the past year, but it’s a fitting analogy.1 It has been quite the harrowing journey, and the world of investing and financial planning looks a lot different from “up here” than it did in March of 2022.
The Federal Reserve’s efforts to squash inflation through wave after wave of rate increases seem to have worked. But the economic side effects—for businesses and for personal investors—have been considerable.2 Especially for those approaching retirement with dreams of, for example, traveling the world, now is the time to ensure that your investment strategy can withstand the challenges posed by the higher interest rate environment.
Navigating the Steep Slope
In an era of increased interest rates, traditional fixed-income investments like bonds are no longer the “safe haven” they were considered to be by some. While bonds have historically provided stability and income in investment portfolios, the current scenario has left their yields much less attractive. As a result, many investors are seeking alternative investments that can provide the same stability and income, but with a better return on investment. Investing in solid companies, especially those that offer dividends, will typically be a better path toward reaching higher levels of wealth.
Also, in a higher interest rate environment, it’s important to consider that cash and certificates of deposit (CDs) may become more attractive as alternative investment options.3 As rates rise, the returns on cash and CDs can outpace those of bonds, making them a safer and more lucrative choice for investors seeking to preserve capital and generate income—both important goals in the run-up to retirement.
Keeping a portion of your portfolio in cash or cash equivalents can also provide a safety net for long-term investors during periods of market volatility. This cash buffer helps avoid the temptation to sell off investments during market downturns, allowing you to stay committed to your long-term investment strategy. By maintaining a cash reserve, you’ll be well-equipped to weather the storm during tumultuous times and continue on your path toward a fulfilling retirement.
The Long Plateau
The past few years have seen a substantial increase in real estate values and building costs in many areas. But, as interest rates have risen, the dynamics of the real estate market have shifted. Higher borrowing costs can lead to reduced property purchases as financing becomes more expensive for potential buyers. By understanding the potential effects of rising interest rates on real estate holdings, investors can make well-informed decisions and maintain a well-balanced portfolio in the face of market fluctuations.
Higher interest rates also mean that buying a second home, dream home—or even going for that boat you’ve been planning on sailing through your retirement years—all become more expensive prospects. Prices go up, but they seem to be reluctant to go on the descent. In view of the length of today’s retirements, it’s important to revisit the impact such higher interest rates and costs might have on your financial planning.
The Takeaway
The ascent of Mount Interest has undoubtedly forced a new perspective on investing and planning for retirement, even for those who already had a solid financial plan in place. By reevaluating your plans in light of the new world of higher rates and higher costs in general, and by seeking the guidance of a financial advisor along the way, you can have more confidence in achieving your goals—even those that are not so easy to reach!
1 https://www.forbes.com/advisor/investing/fed-funds-rate-history/
2 https://www.investopedia.com/articles/investing/052814/these-sectors-benefit-rising-interest-rates.asp
3 https://www.nerdwallet.com/article/banking/cds-fed-rate-increase
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