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Even a cursory reading suggests that interest rates will remain high for a long time in 2024.
People nearing retirement need to factor that into their investment decisions and also consider the bigger picture. Is “high for a long time” a good time to retire, or is it a reason to delay retirement?
The Fed’s next meeting is March 19-20, but few economists expect it to announce a rate cut. The Fed’s June meeting is likely the time for its first rate cut, but that date could be pushed back further if inflation rises faster than expected.
For now, key interest rates have remained stable in the 5.25% to 5.5% range, the highest level in 22 years, a sweet spot for investors, especially those preparing for retirement. .
To explain what the interest rate brouhaha means for that demographic, I spoke to several wealth management advisors to hear their conclusions.
read more: Planning for Retirement: A Step-by-Step Guide
Lock in today’s high rate
First action: If you need cash savings to cover your retirement expenses, it’s time to stockpile large amounts of cash in low-risk fixed income investments such as Treasury bills and CDs. One easy way to do that is to take a cut of the profits from your stock holdings.
“Higher interest rates are helpful because they increase interest income from CDs and cash equivalents as part of your overall emergency savings and retirement asset allocation,” said Daniel Hsu, executive wealth management advisor at TIAA. . “Especially if you’re conservative by nature.”
Some certificates of deposit and high-yield savings accounts currently offer interest rates in excess of 5%. The most attractive CD rates, primarily offered through online banks, were recently around 5.5% for a one-year certificate.
This acts as a buffer for the first few years of retirement. When the market goes down, you don’t have to sell stocks at a loss to cover your living expenses or get rattled by cyclical fluctuations.
read more: CDs and Treasury Bills: Maximize your savings
“The decision to retire goes far beyond interest rates.”
Don’t let this be your only sign that it’s time to retire.
“There are many factors to consider when deciding when to retire,” Nick Nefos, head of retirement solutions at BlackRock, told Yahoo Finance. “It’s important to consider what your overall financial situation will be in retirement, including your savings, expenses, and sources of income, including Social Security benefits.”
There is a lot of agreement on this.
Leo Chubinishvili, a certified financial planner with Access Wealth in Roseland, N.J., tells Yahoo Finance, “Retirement decisions should not be driven solely by economic or market conditions.”
“The main factor in your retirement decision should be whether you are financially prepared, including whether you have enough savings to support your desired retirement lifestyle,” he said. . “A well-designed retirement plan should have the flexibility to adapt to both high and low interest rate environments and changing market conditions.”
“When it comes to retirement, for most people, the core of timing is expected expenses and comfort with accumulated balances,” said Lorna Sabbia, head of retirement and personal wealth solutions at Bank of America. added.
Higher rates = more choices
The benefit of higher interest rates is more investment options.
“If interest rates remain high for an extended period of time, investments such as bonds, pensions, and money market accounts may offer higher returns. Therefore, if you are nearing retirement, consider reviewing your retirement portfolio to It may be a good idea to consider rebalancing to take advantage of higher interest rates,” Nefouz said.
Remember: The big picture for retirement requires a rate of return that exceeds inflation and cost-of-living increases, Sue says.
“It may make sense to rebalance now,” he says, “by rebalancing equities and increasing bond income to a little more medium- or long-term maturity type bonds, so that your retirement savings are risk-tolerant.” We will make sure that it is commensurate with the situation.”
And don’t cash out all your shares just yet.
“Rising interest rates in the CD and money markets need to be weighed against the long-term return potential of the stock and bond markets,” Sabbia said. “There is still a need to invest in stocks, not just for people nearing retirement, but even as they near retirement, especially when considering longevity.”
Treasury bills for savers
Another benefit of the Fed keeping interest rates stable and high is that all savers looking for a safe investment of one year or less have access to Treasury bills (T-bills), which are short-term securities issued by the federal government. ), it is possible to obtain the highest yield ever. government. As of March 7, the yield on one-year T-bills was 4.93%, and the yield on six-month T-bills was 5.34%. As of March 6, the yield on the three-month T-bill was 5.24%.
And as long as the Fed keeps interest rates high (which seems likely at this point), investing short-term funds in Treasury bills can yield modest tax returns as well as tax savings. Treasury bills, such as I-bonds and Treasury Inflation-Protected Securities (TIPS), are issued and backed by the U.S. government. Additionally, you can save money with Treasury bills, which are exempt from state and local income taxes.
“T-bill yields are still higher than most online savings accounts and short-term CD yields,” Ken Tumin, senior industry analyst at Lending Tree and founder of DepositAccounts.com, tells Yahoo Finance. Ta.
How treasury bills work
Treasury bills are sold at a discount from their face value. When the note matures, interest is earned on the difference between the amount paid and the face value of the Treasury bill. For example, if he purchases a one-year government bill for $1,000 at an interest rate of 4%, he will pay $960 up front and at the end of the year he will receive $1,000.
Must be purchased on auction day. Auction dates are weekly for all maturities except for his 1-year T-bill, which is set every 4 weeks. Most individual investors place non-competitive bids. This means that you will earn the average yield set in the auction.
If you drop out early, like if you cancel a CD early, you don’t have to pay any penalties or fees. However, if the sale price of the T-Bill is lower than the guaranteed original purchase price at maturity, you may incur a loss.
Newly issued U.S. Treasuries can be purchased through banks or brokerages for terms of 4 to 52 weeks, but fees may apply. You can also purchase online for a minimum of $100 with no fees through the government’s TreasuryDirect program. If you purchase through TreasuryDirect (a government website), you must hold your new Treasury marketable securities for at least 45 calendar days before transferring or selling them (even for 4-week securities). Interest is paid when the security matures. However, large companies such as Charles Schwab, Fidelity, and Vanguard do not charge fees when you purchase T-Bills.
Decide after deciding carefully
If you’re thinking about retiring but haven’t decided when yet, you can buy these bonds and take a little step back as you consider your retirement options.
Important questions to ask:
“To take some of last year’s stock gains and lock in the fixed income portion of your portfolio at these attractive rates,” says Lazetta Rainey Braxton, a financial planner and founder of Lazetta & Associates, What should I do?” he told Yahoo Finance. . “That’s all you have to do right now. It depends on what situation you’re in and what makes the most sense for you.
“You can think about when to retire later.”
Kelly Hannon is a senior columnist at Yahoo Finance. She is a career and retirement strategist and the author of 14 of her books, including “The World’s Best.”Take Control Even Over 50: How to Succeed in the New World of Work.” and “You’re never too old to get rich.” Follow her on X @Kellyhannon.
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