Veteran advisor explains what interest rate cut means for retired people
The Federal Reserve’s surprising 0.5% cut to the federal funds rate will have trickle-down effects on consumer lending and the stock, labor, and housing markets.
While lower interest rates aim to increase consumer confidence, spending, and business growth, some financial products may also be impacted. However, conservative low-risk investments preferred by retirees, such as Certificates of Deposit (CDs) and annuities, may see lower returns.
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We spoke with Bob Powell, CFP and editor of Retirement Daily, to unpack what retirees can expect from this rate cut and future rate cuts through 2025. Lower rates may prompt some retirees to reexamine their investment portfolios.
Retirees should focus on investments with returns above inflation rates
Retirees tend to have risk-averse investment portfolios, as most have passed the “accumulation” phase of their lives and are more focused on maintaining their savings and offsetting inflation risk.
Powell suggests that retirees focus on money market funds and CDs to accrue interest in a less risky way.
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“I think one thing that retirees might consider doing is investing in a way that allows them to take advantage of the existing higher interest rates that may be around,” he said. “So you could invest maybe in a money market fund and earn 4%, which is above the inflation rate.”
“In fact, it's one percentage point above inflation at the moment,” he explained. “So that puts more money in your pocket any time you can earn a nominal rate of return that's higher than the current inflation rate, you get a real rate of return that's positive.”
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CD ladders can help offset inflation
A CD ladder allows retirees to open multiple products with different maturity dates, giving access to different portions of their money.
“Think about investing in those instruments like money market funds or consider laddering CDs,” Powell said.
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“At the moment, you might be able to ladder 1 to 5-year CDs that offer higher rates than what inflation is at the moment, and then that can also put real money back in your pockets, too,” he explained.
Retirees can reap the benefits of getting higher interest rates in the short term while having investments secured that can withstand inflation and market volatility. CD ladders typically allow retirees to earn more across multiple products than if they were to put all of their savings in one long-term CD.
“Those two things should go a long way toward helping retirees invest in a way that — ultimately one of the goals of investing in retirement, or even in your pre-retirement years — is to outpace inflation.”
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