Fed’s latest rate hike: What it means for employee retirement plans

Financial advisors and investors are weighing the implications of the latest rate hike by the Federal Reserve last week.

The Fed announced it will raise benchmark interest rates by three-quarters of a percentage point and indicated that more increases likely are ahead. The latest rate hike is the third consecutive .75% percentage point move and the fifth increase in the last six months, all part of an effort to slow inflation. Combined, the series of hikes has brought the federal funds rate to a range of 3% to 3.25%, the highest it has been since 2008 and up from a rate of near zero to start the year.

The Fed likely is not done, with more rate increases likely on the horizon. “Absolutely,” says Douglas Ornstein, CFA, advisory consultant for TIAA. “We’ve heard this from Fed Chair Jerome Powell and expect this commitment to fighting inflation to continue.”

Investors and advisors are adjusting their strategies in the new rate environment. “For long-term equity investors, prices are relatively, yet significantly, more attractive than they were six months ago,” Ornstein says. “For fixed-income investors, rates are higher than they’ve been in a long time, and it’s tempting to lock that in. Floating-rate bonds are also a way to benefit from rising rates.

“For folks in retirement, It can feel gloomy out there, Fortunately, many retirees aren’t having to borrow money at these relatively high rates to buy a home, though they may be feeling déjà vu, harkening back to the 1970s through 1990s, when they bought their home decades ago.”

He recommends that they review the interest rate they are earning on their cash in the bank.

“Hundreds or thousands of dollars are left on the table by keeping money in an ultra-low- yielding savings account instead of a high-yield savings, money market or CD,” Ornstein says. “You don’t need to leave your bank down the street to make this omelet, but you may need to move some eggs to a different basket.”

What is the best advice advisors can give their clients in the current economic environment?

“Review the interest rates you’re paying on your loans,” Ornstein says. “Review the interest rates you’re getting paid for your cash at the bank, and talk to a financial advisor to ensure your portfolio is well-positioned for inflation risk and rising rates. If you’re at or nearing retirement, consider the benefits of a lifetime income annuity to help address market risk in case the fight against inflation causes recession-flavored collateral damage.”

Mindy Yu, CIMA, director of investing for Betterment at Work, shared her advice for clients in different stages of life: “For investors saving for retirement who have a longer time horizon, continue to stay invested in the market, as they will have more time to recover from the intermittent market volatility,” she says. “By also continuing contributing to their retirement, they are able to purchase more shares of investments at relatively attractive, lower valuations, which will help fuel growth potential in the long run as markets recover.

“Those who have retired should already be in a more conservative portfolio allocation, maintaining larger exposure to shorter duration bond investments, which are less sensitive to rising rates. Lastly, retirees should also curb their spending and decrease their withdrawals if they can afford to. If they must withdraw, they should focus on dipping from emergency savings first and allow their investments time in the market to recover.”