2 Things to Know About the Fed’s Interest Rate Hike
Newsflash! There was a Presidential election on November 8th. (Just in case you didn’t know.)
It seemed like the election would never get here. And now, just like that, it’s finally over.
No matter who you voted for, the completion of the election motivated me to try and find an issue where a bi-partisan collection of people might enjoy some common ground. Simply, who might benefit the most now that the election is finally over?
Retirees and ultra financially conservative investors, that’s who.
Briefly, last December (2015), the Federal Reserve, thinking the economy was finally strong enough to withstand an increase, nominally raised interest rates for the first time in seven years. This actually led some economists to predict that the Fed might increase rates several times in 2016.
While that obviously didn’t happen, this week the Fed raised rates for the first time in a year (and only the second time in 8 years).
And I wouldn’t be a bit surprised, depending on the perceived strength of the economy going forward, if this was just the first of many times in the coming months that the Fed raised rates.
Here are 2 ways that higher interest rates could benefit financially conservative retirees.
- More Bang for Your “Safe” Investment Buck
The last 10 years have been extremely hard on retirees and people who rely on savings accounts and CDs to stash their cash. The meager returns have not even outpaced what has been a period of extremely low inflation. This means people who can’t stomach at least some investment risk (and refuse to invest in stocks) are gradually losing buying power.
As long as you are well diversified, investing in the stock market (as a part of a comprehensive financial plan) can be a great way to pad your nest for the future. So while I don’t anticipate that we’re likely to see an increase of the federal funds rate to anything approaching the 5.25 percent we had back in 2006, and while regular, nominal hikes (like we saw this week), certainly aren’t going to completely change the fortunes of investors, it would still be welcome news for the risk-averse amongst us who aren’t comfortable investing in the stock market.
- Long-Term Care Insurance Premiums Should Fall
According to AARP, a healthy 65-year old couple will spend $245,000 on healthcare during retirement. But that, of course, doesn’t include emergencies or serious illnesses. Lots of people buy long-term care to help pay for catastrophic health setbacks, but those costs are prohibitive: A couple in their mid-50s can expect to pay $3,100 annually.
While premiums have never been this high before, low-interest rates are at least partly to blame. That’s because while the investments of insurers suffer in a low-interest rate environment—just like yours and mine—insurers can compensate for lower investment revenue by charging you and me higher rates.
But there’s hope. As interest rates continue to rise, retirees should see some relief as the cost of long-term care premiums might start to fall.
While there are some advantages, mostly for borrowers, low-interest rates typically mean less money for savers. Whether you are a conservative investor, or someone willing to accept more risk in the pursuit of higher returns, talk with an advisor today to make sure that your portfolio is allocated in a manner that is going to help you meet your financial goals.
 AARP Medical Resource Center, January/February 2014