After multiple Federal Open Market Committee meetings where they kept interest rates unchanged, it's looking more and more likely that a rate cut will be happening in the September meeting.
Experts predict there's a near 85% chance that the Fed will lower the rate by 25 basis points to 400-425.
Higher rates are great for savers and difficult for borrowers, so as a retiree, what should you be doing?
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Lock in CD Rates Now
When rates fall, the interest rate you get from your savings does too. This means certificates of deposit and savings accounts will see their rates lowered, usually ahead of and in anticipation of the Fed. If you have cash you wish to keep a high yield on, locking them into a CD is the right move right now. If you don't, you'll watch the rates fall and won't have any other choice.
Beware Inflation Risk
Whenever the Fed lowers interest rates, it makes borrowing cheaper and increases the risk of inflation. After the runaway inflation of the last few years, it's a risk that the Fed is watching very closely. One way you can hedge against that risk is to invest in bonds that adjust for inflation, such as TIPS or Series I Bonds.
Alternatively, you could also consider holding gold, either in a Gold IRA (such as with Augusta Precious Metals) or separately from your retirement assets. Gold is seen as a store of value and thus a hedge against inflation.
Review Your Bond Holdings
When rates fall, the bond prices rise. That's because the risk free rate is lower and your bonds will increase in their value. The longer the term of the bond, the greater the impact of changing interest rates so this may be a good time to evaluate your asset allocation.
You may find that your percentage in bonds has increased due to the price increase.
Prepare to Refinance
When the Fed lowers the rate, rates on loans go down as well. This may be a good time to review your options on any outstanding debt to see if you can refinance it into a lower rate option. This can be anything from a mortgage to home equity line of credit to personal loans. Rates will all sink and it may make sense to refinance.
Re-Evaluate Your Cash Balances
As interest rates fall, your may be holding onto lower yielding cash than before. You will want to analyze your position to figure out whether you should shift some of your cash into other fixed-rate instruments. You will want to do this in conjunction with your other cash inflows, as your interest income will fall due to lower rates.
Shift Towards Dividend Stocks
If your monthly cashflow relied on interest income, you may wish to shift some of your investments towards dividend stocks so that you can generate additional income. Dividend income is a bit more challenging to schedule, since companies offer it at different times, but it's a good option for generating cashflow if you see a shortfall.
Plan for Longevity Risk
If this is the start of an extended period of lower rates, consider how that may affect your long-term financial plan. Lower yields can result in the risk that you outlive your assets if you lean too much on fixed-income, which would be pressured by lower rates. If this is a risk, you may wish to consider an annuity for predictable cash flow. This may also be a good time to evaluate your long term care needs too.
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