Retirement planning can be tricky, with multiple components that must align for a comfortable retirement.
Two substantial factors have recently emerged to challenge this balance: rising interest rates and inflation. In this article, we discuss the impact of these economic realities on retirement planning for individuals and the strategies recommended by Retirement Planners of America.
The Debt-free Retirement Goal
Retirement Planners of America tell their clients, “When you retire, so should your debt.”
They work with clients to create a Retirement Cashflow Plan (RCFP), a living document reviewed biannually to help reach that goal. If achieved, exposure to interest rates is reduced to a great degree.
The goal is to be debt-free before retirement, thereby minimizing the influence of interest rates on loans, borrowing, and debt management. Their strategy is rooted in prevention, effectively shielding clients from the effects of interest rate fluctuations rather than reacting to them once they occur.
Understanding the Interest Rate Paradox
One misconception is that rising interest rates could spell doom for the stock market. However, history shows this premise is inaccurate, as many bull markets have occurred alongside rising interest rates.
This paradox is because profits tend to soar when the economy thrives, leading to stock market gains. The Federal Reserve may raise interest rates to avert the economy from overheating. Still, this period of rising interest rates frequently coincides with solid profits.
Therefore, the stock market can be a more favorable investment than bonds during these times.
The Impact of Rising Rates on Retirees
Higher interest rates could be a blessing for individuals on a fixed income. It can increase income generated from safer investment options. Retirees often depend on fixed sources of income, such as pensions, Social Security, and savings in fixed-income investments.
These investments’ interest or dividend payments also increase when interest rates rise. While this results in retirees earning more money, retirees should always be mindful of possible downsides, such as the impact of rising interest rates on the value of their existing bond holdings.
The Bond Market Conundrum
The current economic landscape has led to a significant departure from traditional retirement portfolio allocations of stocks and bonds. Retirement Planners of America exited the bond market in April 2024, sparing clients from the substantial losses experienced by some investors.
The recent bond market performance, which Bloomberg labeled the worst since 1787, highlights the speed and magnitude of the Federal Reserve’s interest rate hikes. This bond market volatility has weighed heavily on some 60/40 portfolios, with some down over 20%.
Why a Human Overlay Matters
The old approach of creating a 60/40 portfolio and leaving it untouched, apart from rebalancing and withdrawing 4% in retirement, is no longer viable. It’s essential to have a human overlay to navigate the complexities of today’s financial markets and help make informed decisions concerning portfolio components.
The Role of Human Oversight
An experienced financial adviser who can help make timely adjustments to your portfolio may be helpful during market turbulence. While automated investment platforms can provide essential guidance, they often don’t have the understanding and ability to respond to market dynamics in real time.
The Investment Committee at RPOA uses Retirement Planners of America’s ‘Invest and Protect Strategy’ and their vast understanding of market trends to make informed decisions concerning clients’ portfolios.
Looking to the Future
While the future is uncertain, there is potential for bonds to regain lost ground if the Federal Reserve pauses or lowers interest rates. There is a 50/50 chance the Federal Reserve will raise interest rates in December. If they decide to pause, that could bode well for bonds in the long term.
Retirement planning can require a dynamic approach in today’s ever-changing financial landscape. Understanding the relationship between interest rates, inflation, and investment options is essential. However, the fundamental principle remains: Adaptability is vital in retirement planning, especially during inflation.