What the Federal Reserve’s inflation policy means for your retirement savings

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The Federal Reserve has kept interest rates low for more than a year, and a new policy could also keep interest rates low for the foreseeable future, she said in a policy statement on Thursday.
The central bank said it would tolerate inflation “moderately above 2%”, although it did not say exactly what that meant. Dallas Fed Chairman Robert Kaplan clarified later in the day that inflation can range from an annual rate of 2.25% to 2.5%.

If this happens, the Federal Reserve might not raise interest rates as frequently. Inflation measures how fast (or not) the price of goods and services is rising, while the interest rate a lender uses to charge a borrower is often based on the Federal Reserve’s fed funds rate – this the latter can influence the former.
Interest rates have remained fairly low in recent months. Almost a year ago the Federal Reserve cut interest rates to less than 2%, then again earlier this year to around 1% and then, at the start of the pandemic, interest rates fell. were between 0% and 0.25%. Low interest rates can be beneficial for consumers, who may indirectly benefit from slightly lower rates on credit card debt and mortgages – but it could also have a negative effect on retirement savings, because the growth of some investments will be slowed down.

“Fed policy makes it clear that we should expect low interest rates for years to come,” said Larry Luxenberg, director of Lexington Avenue Capital Management. “Really safe investments won’t pay off much.”
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The problem: The closer a person gets to retirement, the more likely their portfolios are to represent conservative investments, like bonds. These “safe assets,” in response, will see reduced returns, said Eric Walters, managing partner and founder of Summit Hill Wealth. “As a result, they need to revisit their retirement plans using lower return assumptions,” he said. Many plans are based on historical average rates of return, which could be anywhere from 4% to 5% for intermediate bonds, he said. “Using these assumptions now for a retirement plan could be disastrous when the real interest rates for 10-year treasury bills are 0.74%.”
Not all Americans are sufficiently prepared for retirement either. Near retirees may not have as much (or not at all) in retirement savings and depend on cash and cash equivalents, such as certificates of deposit, which suffer in low interest rate environments. Bank accounts, including checks and savings, earn less interest during these times.
People in their 60s may not have to worry right now, said Jennifer Weber, vice president of financial planning at Weber Asset Management, especially as people are living longer and better lives. health and may be working until the age of 60 and 70. According to actuarial tables, “a healthy 65-year-old has decades to live,” Weber pointed out. “This individual should have a reasonable amount in the stock market (assuming he / she has enough savings) since the stock market tends to do well in a low interest rate environment.”
However, near retirees should be on the lookout for the impact of this new policy on their nest egg. Low rates could affect retirement buyout offers and single premium annuities, which could be stuck in permanently low rates, said Malcolm Ethridge, executive vice president and financial advisor to CIC Wealth.
Investors can look to stocks to make up for lost interest on bonds, said Michelle Buonincontri, financial advisor at “Being Mindful in Divorce”. “This potentially creates greater exposure to the stock market and risk for investors who would previously have used safer bonds to subsidize retirement income needs,” she said. But they should try to avoid relying too heavily on stocks, whose current valuations are above historical norms, Walters said.
“Retirees need to prepare a financial plan with lower projected returns for stocks,” Walters said. “By using lower projected yields for bonds and stocks, retirees can focus on avoiding running out of money and asking for help from their children or trying to return to work.”

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