With word this month that long-term interest rates have reached their highest levels in almost two years, we’ve arrived at what Dan Kadlec of Time Magazine referred to as “the likely end to what has been a brutal period for savers and income-seeking retirees.”
This should come as no small relief to baby boomers, many of whom had to delay retirement a few years back because of the banking crisis. For many retired people who live on a fixed income (or no income at all), there are several good reasons why higher interest rates today are a blessing.
How Seniors Can Thrive With High Interest Rates
According to data from the National Retirement Risk Index, published last June by the Boston College Center for Retirement Research, 65 percent of retirement-age individuals are concerned that consistently low interest rates could hurt their retirement finances. So it pays, literally, to know how rate hikes can benefit seniors.
Photo credit: 401(K) 2013
1. They have limited recurring debt.
Unless you’re 63 and are planning to live into your 90s paying off that new 30-year mortgage, you’ve most likely repaid your major debts and own your house, your car, etc. You’ve got no reason to borrow money, and this is where high interest rates won’t have a detrimental effect on you, according to Forbes contributor Barry Glassman.
2. Higher rates mean lower pressure to raise income.
Glassman said that in the last few years, many retirees hit dire financial straits, their savings drying up from low-to-nonexistent interest rates. The resulting drawback? Not enough of a nest egg to invest and maintain their lifestyles.
“Now,” Glassman wrote, “10-year Treasury notes are paying 60% more than they were just six weeks ago meaning that $100,000 of Treasuries that were paying about $1,650 are now paying roughly $2,600. The result — retirees won’t need more capital to produce more income.”
3. They made wise investment choices.
“When interest rates increase, the prices of existing bonds — those with fixed rates of interest — decline until their effective yields are consistent with the new level of interest rates,” noted Philip Moeller in a U.S. News & World Report article.
But wise investors who put money into the stock market instead of bonds see better returns when rates are high. Forbes’ Hardeep Walia explained that buying stock in names like Bank of New York Mellon, State Street, Schwab, Ameritrade and Paychex are ideal in high-interest climates.
4. Interest rates could surpass stock yields.
“The dream of a 4 percent or 5 percent safe yield is a little bit closer to reality,” Glassman wrote. If and when rates get that high, the closer they’ll come to yielding the income derived from financial portfolios, he said, and “the less retirees will need to rely on the stock market to succeed financially through retirement.”
5. Rates are up, prices are not.
“The small increase in interest rates has done little more than foster concern about rising mortgage rates and virtually nothing to please retirees,” said Frank Addessi of SmartAsset. If that’s true, baby boomers may want to consider that, though interest rates are up and interest rate projections for the rest of the year are also high, inflation on goods and services is not. “At this point, inflation is benign while future portfolio income is on the rise,” Glassman wrote.
Regardless of your age, it’s never too late to start your retirement savings. With the continued promise of rising interest rates, taking advantage of wise investment and saving practices now can go a long way to giving you the leverage you need in building a substantial nest egg for years to come.