Rate changes don’t have to derail your retirement plans
Tom King CFP, CLU, AEP is an Enrolled Director of King Financial Partners at State College
For those nearing retirement or living in retirement, the Federal Reserve’s decision to keep interest rates lower for longer may trigger a hunt for yield.
In this extremely low interest rate environment, investments like Treasuries don’t pay much, with CDs and money market accounts following suit. However, there are still opportunities for those who are considering switching to less risky assets. Patience, calm, and perspective can help you navigate the field.
Clear generic advice
If you don’t yet have a financial strategy for retirement, you’re not alone. Almost 46% of retirees surveyed amid the pandemic said they did not have a plan, according to the Transamerica Retirement Studies Center.
A modest 12% of retirees said they have a written strategy. Others may consider relying on catch-all advice such as “owning your age in bonds,” swapping the growth potential and risk of stocks for relatively stable bonds as you get closer to exit. labor market. But this tip is much less useful today – and perhaps never has been.
Instead, professionals like me recommend a goal-based strategy that allows you to align your time horizon and your investment mix, helping you calibrate the level of risk you’re willing to take. Such a focus becomes more essential in an era of low interest rates and market volatility.
See the ray of hope in bonds
For years, cautious investors have been challenged by low short-term interest rates. If they start to rise, fixed income investors will remember the inverse relationship between the value of bonds and interest rates. As interest rates start to rise, bond prices generally fall. This has some investors sitting on the sidelines waiting for it to happen.
What these investors forget is that high quality bonds, such as investment grade bonds, always provide predictable income regardless of the direction of interest rates. The “fixed” nature of individual bonds gives investors the choice of simply holding their bonds until the maturity date and receiving face value in the event that interest rates rise.
“As the stock markets regularly hit record highs, it’s important to remember why you allocate a percentage of your assets to fixed income,” wrote Doug Drabik, managing director of Raymond James Fixed Income Research in January. “The most important thing is to preserve the wealth that you have just accumulated.” The reasoning is this: When the funds you’ve set aside for short-term needs are invested in low-risk, low-volatility investments, you may feel more comfortable taking risks in the rest of your life. wallet.
Combine multiple income streams
In our years of work, we have grown used to relying on just one paycheck. But in retirement, it becomes essential to create various sources of money. There is social security, of course, but think bigger. Rental income, real estate, 401 (k) s and IRAs, company-funded pensions, part-time work, and investment income from dividend-paying bonds and stocks can play a role. role in funding your preferred retirement lifestyle.
Like a stone in a pond
“At any time, in all markets, in all regions of the world, the slightest change [interest] rate changes the value of each financial asset. “
Although famed investor Warren Buffett uttered these words decades ago, they have additional resonance in today’s investment landscape. With a thoughtful, documented retirement strategy and smart diversification, you can be prepared for the ripple effect of rates.
Tom king CFP®, CLU®, AEP® is the registered director of King Financial Partners (222 Blue Course Dr., State College, PA). King Financial is a team of accredited professionals specializing in retirement, investment management, wealth transfer and estate planning. Tom can be reached at [email protected] or (814) 234-3300.
There are risks involved in investing and investors may experience a profit or a loss. Bond prices and yields are subject to change based on market conditions and availability. If the bonds are sold before maturity, you may receive more or less than your initial investment. There is an inverse relationship between changes in interest rates and the prices of fixed income securities. In general, when interest rates rise, the prices of fixed income securities fall, and when interest rates fall, the prices of fixed income securities rise. Links are provided for informational purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information about the users and / or members of any website. Sources: Raymond James Comments and Insights Fixed Income Research Raymond James, Pew Research Center; Transamerica Retirement 2020 Survey of Retirees, Fortune Magazine
Securities offered through Raymond James Financial Services, Inc., FINRA / SIPC member. © 2021 Raymond James Financial Services, Inc., FINRA / SIPC member. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. King Financial Partners is not a registered dealer and is independent of Raymond James Financial Services.