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Financial and Retirement Planning Blog

Does The Fed Lowering Interest Rates Really Hurt Retirees?

In most cases, the actions of the Federal Reserve lowering interest rates are a good thing because a lot of economic activity depends on the ability of businesses to borrow money. It is of course easier to borrow when interest rates are lower, but lowering interest rates too much could affect investors who may see lower returns on certain funds in their portfolio. Certainly the stronger the economy, the better the returns will be on certain investments, but lower interest rates could affect certain low risk investments that seniors may be more dependent on for when they can no longer get their regular income stream from a nine to five job.

Annuities And CD Accounts Could Have Lower Returns

Fixed rates in both annuities and CDs could mean less dividends coming in for account holders because if the Fed’s interest rates are low, annuities tend to perform lower and savings earn less. Now if you were to enroll in a fixed rate annuity while interest rates looked favorable, they would remain the same and not decrease with a Fed interest rate cut. But if you locked in fixed annuities while the interest rates were low, the long-term outlook may not be as good. The same holds true with CD accounts when interest rates are low. That’s why you may be better off going with a variable rate annuity where you have more investment options that may not be as impacted by the Fed, or a CD ladder plan or money market account so you aren’t potentially missing out on better earning opportunities.

Bonds Could Be A Less Attractive Investment

Unlike stocks, which could go up in value when there’s more money to borrow thanks to lower interest rates and encouraged economic activity, it doesn’t look nearly as good for the bond market. When the Fed cuts interest rates, bond yields also go down while their prices go up. So it would make more sense if the Fed’s rates were going to drop that you would then sell any bonds you held assuming that economic activity was going to pick up. But if you were to assume the opposite, you may want to hold onto more long-term bonds and make sure any potential losses on short-term bonds are offset by those.

You Have To Watch Out For More Expensive Long-term Care Insurance Premiums

One of the problems that also comes with lower yields in the bond market is more expensive long-term care insurance premiums, a problem that has happened over the last 20 years. As research found, the average cost of long-term care in 1990 was about $1,071, but then by 2015 that cost had more than doubled to $2,772. Inflation has certainly played a role in this, but with many insurers also being bondholders who are experiencing low yields and less returns on investment, this has also forced them to raise the cost of their products. This doesn’t mean that all long-term care policies should be ditched, but seniors and their advisors have rolled back benefits on occasion to make policies more affordable.

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