“The rate hike is becoming something like theGreat Pumpkin from the Peanuts cartoons … higher interest rates from the Fed are out there somewhere, but never quite seem to materialize, no matter how patiently we wait,” said Lawrence Solomon, a certified financial planner and director of investments and financial planning at OptiFour Integrated Wealth Management. Like many, however, he expects interest rates will finally go up sometime in the fourth quarter of this year or early first quarter 2016.
The longer we’re all held in interest rate limbo, the more unpredictable — and dramatic — the results of a rate hike will likely be on markets and American’s finances. Unfortunately, no one can say with certainty whether the effects will be mostly positive or negative until it happens. For those who hope to retire some day, that uncertainty is disconcerting at best.
To be sure, some observers of the monetary policy say that a rate hike will be beneficial. “I actually believe that a rate hike will be well-received by the market, as it has been much anticipated,” said Robert R. Johnson, president and CEO of The American College of Financial Services. “The market is suffering from Fed fatigue, and a rate hike would eliminate any uncertainty that market participants have with respect to the Fed. One investment truism that seems universal is that markets abhor uncertainty.”In anticipation of rising rates, there are a few steps future retirees can take to preserve their wealth.
“Investors would be well served to do some sector rotation in their portfolios,” Johnson said. He recommended selling some stocks from industries that perform well during falling rate environments, such as apparel, retail, construction, durable goods and autos, and buying stocks in industries that perform well during rising rate environments, such as energy, consumer goods, utilities, food and steel products.
In the long-run, however, Johnson advised investors to temper their expectations in a rising interest rate environment, as returns on equities will be lower in general.
Investors should get out of bonds and look for other safe, secure options to protect their money, said Michael Foguth, president and founder of financial services firm Foguth Financial Group in Howell, Michigan. “History shows when interest rates go up, bond values go down. Most people use bonds for safe money — when interest rates go up, bonds will no longer hold the title of safe.”
Increasing the fed funds rate directly affects how much it costs banks to borrow from each other. The direct effect for consumers will be that the cost to borrow will increase. “If you have a variable rate mortgage loan or are in the market to borrow money for a large purchase, the fed rate hike will make borrowing slightly more expensive,” said Kyle Winkfield, managing partner at Englewood, Colorado-based O’Dell, Winkfield, Roseman & Shipp, which provides retirement financial services. Borrowers should either lock in today’s low rates, or work to eliminate potentially expensive debt that could eat at future retirement savings.