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How Interest Rate Cuts, Falling Inflation Could Affect Clients in or Near Retirement

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What You Need to Know

  • The Federal Reserve has indicated that it could cut interest rates in 2024 as inflation falls.
  • Lower interest rates and lower inflation are generally positive factors for investors as they leave the workplace.
  • Now may be a good time to consider a fixed annuity or a CD ladder.

In its recent meeting, the Federal Reserve decided to maintain the federal funds rate in the 5.25% to 5.50% range. The Fed’s statement also indicated that we can potentially expect three cuts of 75 basis points each in 2024, although this is not set in stone.

Rate cuts, along with the associated easing of inflation that the Fed cited as one reason behind the announcement, could have several potential effects on clients who are retired or nearing retirement. 

Lower interest rates and lower inflation are generally positive factors for the markets and the overall economy. However, each client has an individual situation that may be affected a bit differently by rate cuts and reduced inflation. 

Here are some potential impacts of the Fed’s announcement, including the prospect of easing inflation. Note that other factors beyond interest rate declines and easing inflation will often come into play, potentially causing different outcomes than we might anticipate. 

Higher Returns on Bond Holdings 

The value of bonds moves inversely with the direction of interest rates. If interest rates fall, clients could see gains in the value of bond holdings in their portfolio. This includes individual bonds, bond mutual funds and bond exchange-traded funds. Longer duration bonds would see the greatest impact. 

While certainly not advocating market timing, should these rate cuts materialize and lead to declines in bond yields, it may make sense to review clients’ bond holdings. 

Individual bonds held to maturity through a bond ladder or similar strategies should be fine, but bond funds and ETFs could experience more volatility than normal depending upon what the Fed does with rates after any initial cuts. This may result in more risk than anticipated for retirees and those approaching retirement following the initial gains in value from the rate cuts. This should be a consideration as you review client portfolios and as you rebalance them.   

Savings Vehicles and CDs

One of the positive aspects of higher rates has been higher interest rates on safe investments such as money market funds, certificates of deposit, money market accounts and similar savings vehicles. These rates have led to the popularity of Series I savings bonds as well. Retirees and near-retirees have realized solid returns on these very low-risk investments. 

If the Fed follows through on the suggested rate cuts for 2024, this would directly affect the yields available on these safe investments. This could lead to lower income for these clients or force them to seek higher yields in riskier investments. While money markets and similar savings vehicles are not expected to revert to the yields below 1% that we saw just a couple of years ago, interest rate cuts will reduce the rates on these types of accounts.    

In the case of CDs, this may indicate a good time to consider a laddering approach if appropriate. This locks in current higher rates over time and allows you and your clients to determine the best use of this money when each rung of the ladder matures. 

Fixed Annuities

Another benefit of the current interest rate levels for retirees and those nearing retirement is higher guaranteed payouts on most fixed annuities. When bond interest rates are higher, insurance companies can guarantee a higher fixed interest rate over the guarantee period. 

For clients looking to lock in a higher guaranteed rate and a higher payout on a fixed annuity, this might be a good time to purchase that annuity. This applies to both fixed immediate annuities and to fixed deferred annuities. 

Potential Stock Gains

Since the Fed’s announcement last week, the stock market has seen a decent jump. This may or may not be indicative of what to expect if the Fed follows through with the three suggested rate cuts. 

Generally, lower interest rates are a positive for the stock market, in addition to their positive effect on bond prices. This combination can help boost the portfolios of retirees and those nearing retirement. In the case of retirees, this can help increase the level of investments available to tap during retirement. In the case of those nearing retirement, excess stock market gains can allow them to potentially reduce their risk level. 

These potential investment gains make rebalancing especially important as you help clients balance potential gains with portfolio risk management. 

Improved Purchasing Power

One of the issues cited in the Fed’s recent announcement was an easing of inflation. Retirees are especially affected by higher prices due to the fixed nature of at least a portion of their income stream. Lower prices and increased purchasing power can help reduce the amount they spend for some necessities and may help them reduce or at least not increase the amount they need to draw from their retirement accounts. 

While inflation tends not to be uniform across sectors, lower inflation rates will generally be a positive for retirees and those nearing retirement. This will vary based on where they spend their money. 

Lower Social Security COLA 

Social Security cost-of-living adjustments are based on inflation. The COLA for 2023 was 8.7%, the highest rate in more than 40 years. The COLA for 2024 is 3.2%, although this is higher than the historic average of about 2.5% since the 1990s. 

Lower inflation will likely continue to keep COLAs smaller. Even with lower rates of inflation, lower COLA increases will hurt many retirees in that the COLA increases often trail the true inflation that retirees experience. 

Lower Mortgage Rates 

Reductions in the federal funds rate should help reduce the interest rate on home mortgages. This could be beneficial to clients who are retired or near retirement if they are looking to purchase a home and need to finance some of the purchase. 

More likely, lower mortgage rates will benefit retirees and near-retirees looking to sell their home to downsize or relocate.


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