The word on the street says that interest rates are going to be on the rise in the near future.
So, you might be wondering:
- How will rising interest rates affect your retirement?
- How will rising interest rates affect bonds and stocks?
But wait! Before we jump into how rising interest rates could affect your retirement, you’ll also want to make sure you avoid ONE of the biggest retirement planning mistakes that most retirees make. To learn what this mistake is and how to avoid it, click here to watch this video.
Watch the video version of this article here:
Are interest rates going to rise soon?
So according to a recent article on Bankrate.com The US Central Bank will hike interest rates this year by the most since 2005.
How much of an increase will we see? That all depends on who you ask.
Goldman Sachs is penciling in seven increases, while traders are betting on at least six, according to CME Group’s FedWatch. (Chicago Mercantile Exchange Group)
So if many analysts believe interest rates are very likely to rise soon, then the next question you need to ask is…
How will rising interest rates affect retirement Investors in the Rockford area and beyond?
Many people have moderate retirement portfolios that are 60% Stocks and 40% Bonds.
Bonds have historically helped mitigate stock market volatility risk
So that’s why many portfolios use both stocks and bonds like this in retirement.
Interest rates are directly correlated to bond values.
When interest rates go up bond values ALWAYS go down.
If we look at this from a historical view, interest rates have been on the rise generally speaking from 1950 to 1980 and then since the 1980s, interest rates have been on a steady decline.
So here we are on a historically low-interest rate in history poised to go up.
And then we have inflation concerns and of course, the FED is probably going to use interest rates to try and slow down inflation.
And what effect will rising interest rates have on bonds?
Well, as I just mentioned, as interest rates increase, bond values are very likely to decrease
How can you protect yourself from declining bond values?
So, if interest rates are likely to increase, the next logical question is: ‘what can I do to protect myself and my portfolio if bonds are not the safe haven that they once were?’
And if the Fed continues to raise interest rates over this year and the next what will happen to the so-called “safe bonds” in your portfolio?
Instead of using bonds to mitigate risk, you can look to other investments that hedge risk using Options.
For example, you could look into moving into…
- A heavier stock portfolio (but be aware of increased volatility)
- Alternative investments such as structured notes
- Or even something as safe as index linked annuities where you receive a guarantee of principal
There are many ways you can adjust your portfolio to reduce the interest rate and default rate risks of bonds, but you really need to speak with a knowledgeable financial advisor who looks beyond traditional solutions.
In the meantime, be sure to check out my short 10 min video on how to avoid one of the biggest mistakes in retirement and retire stress-free.