The Fed Just Raised Rates. Here’s What It Means for Your Retirement

On Wednesday, the Federal Reserve raised the interest rates by a quarter of a percentage point, to a range of 3.75% to 4%. A 0.25% increase might sound small, but the Fed rate has tremendous control and influence on the U.S. economy, and even the slightest hike (or dip) has significant repercussions for pretty much everyone. Retirees are no exception and there’s an argument to be made that they are among those most affected.

Why did the Fed bump up rates for the first time since 2023, and is it a good thing or a bad thing for retirees? Should retirees be rethinking their financial planning? Let’s dig into a pretty complex matter.

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High Inflation Is What Prompted The Fed’s Rate Hike

Most Americans are being hit hard by inflation, which is currently 3.40% (up 0.40% from July, which again, may not sound like a big increase but is a significant one when noting the ideal inflation rate is 2%).

“Inflation simply has not cooled as policymakers hoped, and the data left the Fed little choice,” said Ryan Dykmans, CFA, President and Chief Investment Officer of Dunham & Associates Investment Counsel, adding that the Fed rate hike is hardly a shocker.

“We have been rebalancing our strategies for months because we believed the market was underpricing this risk, so the real surprise is that anyone is surprised,” he said.

A Rate Hike Can Benefit Retirees’ Cash Savings

Rate hikes get a bad rap for a good reason: They increase borrowing costs. For example mortgage loans, already sky high to the point of stalling the U.S. housing market just got higher, making buying or selling a home even more challenging.

But on the retirement side, a hike can be a good thing.

“Higher rates can increase yields on cash savings,” Dykmans said.

Example: Say you’re retired and have your emergency savings in a high-yield savings account. You can expect the bank where your HYSA lives to inform you within the next couple weeks announcing that your APY (annual percentage yield) just went up. (If you don’t get that message, switch to a better bank.)

A Rate Hike Can Hurt For Retirees’ Investment Portfolio

Though good news for a retiree’s cash savings, a rate hike could seriously hurt their investment portfolio, which is (hopefully) far heftier and more integral to their retirement plan than an HYSA.

“[Rate hikes] can weigh on economic activity, growth and asset prices,” Dykmans said.

The problem is multifaceted and there are a great many very long and very detailed books about it. But to be exceptionally brief: The issue is that high rates result in an economic slowdown for borrowers.

This doesn’t just affect consumers; it also impacts mega corporations taking out, say, a multi-million dollar loan to build out new locations or offerings. Higher interest costs, causing them to back off from potentially major and worthwhile investments. This could stall their own growth which could then cause their stock values to drop. This creates a storm to ride out and retirees may not have as much time to ride storms out as, say, Gen Z.

Additionally, interest rate hikes up the value of bonds on the market. Great for bond buyers, bad for bond holders. The bond you bought at 3.75% just became wholly unappealing to anyone buying bonds following the rate hike because they can now get a 4% bond instead. It’s a no-brainer bigger bang for your buck scenario. 

“Liquidity, diversification and emotional discipline can provide a strong foundation. That may include maintaining a cash cushion sufficient to cover a few years of spending, building a portfolio in which no single surprise can cause lasting damage, and avoiding the urge to sell out of fear or chase returns out of greed. From there, adjustments to bond duration, cash holdings, and equity exposure become a matter of calibration rather than panic.”

Ryan Dykmans, CFA, President and Chief Investment Officer of Dunham & Associates Investment Counsel

So…What Should Retirees Do Now?

What retirees do or don’t do with their financial planning in the wake of the Fed’s rate hike depends on a host of factors including age, assets, liquidity — the list goes on. Still, there are some basic moves every retiree should be thinking about and, more importantly, talking about with their trusted financial advisor.

“Liquidity, diversification and emotional discipline can provide a strong foundation,” Dykmans said. “That may include maintaining a cash cushion sufficient to cover a few years of spending, building a portfolio in which no single surprise can cause lasting damage, and avoiding the urge to sell out of fear or chase returns out of greed. From there, adjustments to bond duration, cash holdings, and equity exposure become a matter of calibration rather than panic.”

Whether the Fed rate hike is good news or bad news or mixed or neutral, it’s an opportunity for anyone — not just retirees — to take a fresh and in-depth look at their retirement portfolio and financial position. That’s something we should all be doing regularly, not just because the Fed, which is fluid to a fault,  changed things up.