How Will Rising Interest Rates Affect My Retirement?

Rising interest rates affect different types of retirement savings and investments in various ways.

Depending on the type of investments you have in your 401(k) or other retirement plan, rising interest rates may have a positive or negative effect. How you react to them can also be one of the more serious risks in retirement.

It’s important to diversify your retirement savings to get the most out of your retirement plan.

Fixed-income investments tend to benefit from higher interest rates. Their yields — the interest they pay on your investment — tend to rise when interest rates go up. These are investment options that typically provide a steady income stream. They also typically have lower risk than stocks.

Annuities generally benefit from higher interest rates. That’s because the insurance companies that sell annuities invest their money in mortgages and other loans. As interest rates increase, the insurance companies also raise the rate on annuities.

As a result, if you buy an annuity after interest rates have been increasing, it will pay you more than if you bought one when interest rates were low.

Higher interest rates tend to hurt certain stock sectors.

The traditional advice is to move investments in your 401(k) or other retirement plans out of stocks and into bonds, mutual funds and other fixed-income investments.

Higher interest rates are connected to rising inflation. Interest rates typically rise to control inflation. So, if interest rates are rising, the growth of all your investments will be further eroded by higher inflation. But moving savings to investments that perform better from high interest rates can minimize the damage.

Rising interest rates translate into higher mortgage rates for new buyers. If you have a fixed-rate mortgage, your rate stays the same.

Typically, higher interest rates — and subsequently higher mortgage rates — force home prices down.

If you’re nearing retirement and planning to sell your house — to move or downsize — then higher interest rates may make it harder for you to find a buyer. It may also force you to lower your asking price.

You’ll also likely have to pay a higher mortgage rate on your new home.

But historically, real estate has been a good hedge against inflation, which triggers higher interest rates. With a fixed-rate mortgage, you are effectively paying the same amount of money each month even as interest rates and mortgage rates rise.

Rising interest rates affect stocks and bonds in different ways.

Stocks historically lose value during times of higher interest rates, and they tend to suffer more when high inflation is present. This trend tends to reverse itself when interest rates start falling again.

Bonds and other fixed-income investments tend to perform better than stocks in high-interest environments. Bonds, for example, are still likely to lose value but not as much as stocks and only in the short term. Falling interest rates make existing bonds more valuable.

There are several steps you can take to keep your retirement planning on track during times of rising interest rates. Regardless of your age or how much you have put away into retirement savings, it’s important not to panic.

Take your time to assess what interest rates are likely to do to your retirement investments. Look at what your reaction to rising interest rates will do in the long term to your retirement savings. Talk with your financial advisor about the best course of action for you.

With annuities and some other financial products that benefit from interest rate hikes, there may be a temptation urge to “time the market.” In this case, that means to wait until interest rates peak before buying an annuity when the rate of return peaks.

Timing the market is difficult to do and financial advisors tend to warn against trying it.

As interest rates rise for annuities, the rate of return that insurance companies offer on their annuities rise in response.
Waiting to buy an annuity until rates max out means you won’t be contributing to it during your wait. That’s money that isn’t benefiting from an already higher rate.

You may want to consider something called annuity laddering. Instead of putting all your money into a single annuity, you divide up your investment cash and purchase multiple annuities periodically as rates increase over a year or more.