How to Prepare Your Retirement Plans for Rising Interest Rates

Interest rates impact our lives in a wide variety of ways – especially financial.

rising interest rates

Why Will Interest Rates Rise?

Since 2008, interest rates have been at historic lows, below 1 percent. Traditionally, rates have been much much higher – ranging from 16.39 percent in 1981 to a low of 3.02 percent in 1993.

The low rates over years reflect the Federal Reserve’s desire to bolster the economy. The Federal Reserve is tasked with the mandate to foster: “maximum employment and price stability.” Raising and lowering interest rates is one of the key ways they do this.

Consider the following six moves to prepare for rising interest rates.

1. Pay Off Credit Cards

You may or may not have noticed, but credit card interest rates have already started creeping upward. Credit card interest rates are usually the highest rates you will pay and little increases can cost you big in the long run. If you have credit card debt, it is more useful than ever to pay it off as quickly as possible.

If you can not pay it off completely, you might want to roll balances into a lower-interest card or home equity loan.

Wondering what the real impact of paying off your credit card debt could be? Try modeling different pay off rates in the NewRetirement retirement calculator. After you set up your account and initial data, you can try different “what if” scenarios. See what happens if you pay off debt at a faster rate or immediately see the impact of higher or lower interest rates. Go to the debt section of Your Plan.

2. Reconsider Investment Strategies

Rising interest rates are just one of the many economic factors that could impact your investments.

“Simply put, stock market returns historically are … much higher when interest rates are trending downward than when they are trending upward,” says Robert R. Johnson, president and CEO of The American College of Financial Services in Bryn Mawr, Pennsylvania, and co-author of “Invest With the Fed,” which explores the stock-interest rate relationship.

You may want to take a look at how your assets are allocated and reconsider percentages in stocks, bonds, and mutual funds. Experts employ a wide variety of strategies like laddering to take advantage of rising interest rates. Now may be a good time for you to consider working with a financial advisor to improve your investment strategies.

3. Lock in Your Mortgage

If you believe that interest rates will rise, now is the time to talk about refinancing and locking in the lowest interest rate possible for your mortgage. This is especially important if you are currently in a variable interest rate loan.

4. Need a Loan? Consider Acting Sooner Rather than Later

If you are considering any kind of loan, then it may be wise to act sooner rather than later. You are more likely to be eligible and you can borrow more money at a lower overall cost to you when interest rates are lower.

This is true of traditional mortgages, home equity loans, car loans and even reverse mortgages.

5. Think Through Future Real Estate Decisions

When interest rates are low, borrowers can access more money and pay higher prices for homes. When interest rates rise, borrowers can borrow less money, which can lower sales prices on real estate.

If you are considering relocating for your retirement in the near future, you may want to think through the potential impact of rising interest rates. Should you make the move sooner rather than later? Sell now and rent a bit to see if prices fall?

You can model different scenarios for your real estate holdings in the NewRetirement retirement calculator. See what happens to your life long finances if you downsize or pay different interest rates.

6. Higher Interest Rates Equal More Income from a Fixed Annuity

When you see an uptick in interest rates, some surveyors say the time is then ripe to purchase fixed income annuities. This is primarily because you’re more likely to see greater returns down the line for a cheaper rate upfront.

“As rates rise, index options become less expensive, and [fixed income annuities] are able to provide more upside potential, making the product more attractive from a growth standpoint,” states a study from the Insured Retirement Institute (IRI).

Fixed annuities are appealing to retirees because they transform your savings into predictable income.

However, annuities can be complex. There are a lot of different options. If you are intrigued by the product, you might want to try an annuity calculator to find out how much income you can get for your money.

Better yet, you might want to try a retirement calculator that enables you to “try on” an annuity. The NewRetirement Retirement Calculator lets you see what happens to your retirement cash flow, net worth and estate if you were to purchase an annuity.

NewRetirement Planner

Do it yourself retirement planning: easy, comprehensive, reliable

NewRetirement Planner

Take financial wellness into your own hands and do it yourself retirement planning: easy, comprehensive, reliable.

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