Fed Rates & Your Retirement Plan

After a year of rising interest rates, higher prices and volatile markets, is it time for Americans to plot a new course for 2023?

With the arrival of the new year, you can also expect an 8.7% 2023 COLA increase issued to those receiving Social Security benefits. 

“Medicare premiums are going down and Social Security benefits are going up in 2023, which will give seniors more peace of mind and breathing room,” said Acting Social Security Commissioner Kilolo Kijakazi. “This year’s substantial Social Security cost-of-living adjustment is the first time in over a decade that Medicare premiums are not rising and shows that we can provide more support to older Americans who count on the benefits they have earned.”

Why Did the Federal Reserve Raise Interest Rates?

The historically low interest rates at the start of 2022 resulted from efforts the prior two years to support the economy after the COVID outbreak. Two years later, as the economy recovered, pent-up consumer demand, supply shortages, and increased gas prices drove prices higher. The Federal Reserve raised rates in September 2022 because inflation remained high at 8.3% despite previous interest rate hikes. 

How Will this Affect Your Wealth in Retirement?

The truth is that the federal rate hike might have little or no obvious effect on your retirement plan—at least at first. The people most hopeful to see changes from an increase in the federal interest rates are especially conservative investors. Individuals with traditional savings accounts and bank CDs will likely see rate increases but probably not for the next year or two as large banks tend to be slow to offer higher rates of return.

Higher rates make it more expensive for small businesses to find the money for expansion, for homebuyers to get mortgages, and for people to finance vacations or other large purchases. Americans need expert wealth management; businesses and residents face unique economic challenges.

Rising Interest Rates

Banks and other lending institutions that issue credit cards set their rates based on the Federal Reserve rate, so credit card rates will increase in the fourth quarter of 2022.

Banks’ rates for auto loans, home equity loans, HELOCs, and other loans will also go up. Existing fixed-rate loans will not change, but adjustable-rate loans will go up to reflect the higher cost of borrowing. With wealth management, Scottsdale homeowners can avoid paying for mortgages they can’t afford.

Your 401(K) Will Drop in the Short Term

It’s no secret that rate hikes are wreaking havoc in the stock market.

It's not always a perfect relationship, but the stock market tends to move in the opposite direction as interest rates. When recessions strike and unemployment spikes higher, the Fed usually slashes interest rates. That boosts economic growth and encourages investor risk appetite, which sends stocks higher.

What does this mean for you? Investors need to prepare for more volatility in their retirement accounts. Don't sell stocks that are temporarily down unless you have to. If you have more than 15 years left until retirement, it's still appropriate to invest for growth. If you're approaching retirement, make sure that you've established the proper allocation of bonds and other low-volatilty assets.

Growth Opportunities

Nobody wants to see big losses on their 401(k) statement, but it's really important to recognize the difference between realized and unrealized returns. For long-term investors, the losses of the past year are only temporary, and a 401(k) is a long-term account for the majority of people under 50 years old.

Those with more time to their retirement date should consider accumulating assets and allocating them for growth. Growth stocks have taken a beating over the past year, which has improved the opportunity for long-term returns. The risk has been reduced substantially now that valuations are cheaper.

How NJM Wealth Preservation Strategies Can Help

The federal funds rate impacts nearly everything as it affects monetary and financial conditions in the United States, ranging from inflation and growth to employment and the economy as a whole.

At NJM Wealth Preservation Strategies, we have the experience of guiding clients through good and bad economic times over the last few decades and can help you work towards your financial and retirement goals.

Retirement planning requires some forward thinking, and it’s never too early or too late to get started. To help combat market turbulence and rising interest rates, reclaim control of your portfolio & see what truly active, professional management can do for your retirement, schedule a call with us today.