What Does the Fed’s Interest Rate Cut Mean for Retirees?

If you’re retired or soon-to-be retired, you might be wondering what the recent cut in interest rates by the Federal Reserve will affect your finances. On September 18, the feds cut its target federal funds rate by 0.5%. This rate reflects the interest rate that banks charge other banks to borrow money. In its announcement, the Fed also hinted at the possibility of additional future rate cuts to further stimulate the economy. The Federal Reserve generally reduces interest rates in an effort to stimulate and improve the economy. A lower rate helps consumer banks charge lower interest rates on consumer loans, such as mortgages and credit cards. The theory is that consumers will pay less to borrow money, which could stimulate their spending and the economy. 

The federal funds rate has a number of possible implications on the markets, and how or if they will affect you personally will depend on your unique financial circumstances. And if you’re like many retirees, there could be both positive and negative effects on your finances. 

This week, I’d like to dive into what this recent rate cut means to help you determine if there are opportunities to use this information to your financial benefit. 

Let’s start by looking at how rate cuts can help your finances. For starters, we need to understand that it might take some time for the Fed rate cut to work its way to interest rates charged to consumers. While a few financial institutions quickly reduced mortgage interest rates and credit card rates in response to the recent rate cut, the impact hasn’t fully worked its way through the financial system. 

For example, as interest rates drop, stock and bond investments often appreciate. As a general rule of thumb, when the Federal Reserve cuts interest rates, it has historically resulted in a rise in the stock market. Bonds in particular are sensitive to interest rates as well, tending to rise in value when rates go down. 

Mortgages are another key recipient of interest rate cuts. Reduced rates on new mortgages or on an existing variable rate mortgage will reduce your monthly mortgage payment. And if you already have a fixed rate mortgage, you may want to consider refinancing it at a lower rate to either reduce your monthly payment or pay it off more quickly. 

If you have substantial credit card debt or any other form of consumer debt, lower interest rates could reduce the amount of interest you pay, putting more money in your pockets to spend. However, the rates charged on credit cards and other consumer debt often stay at high levels even when the Fed reduces the federal funds rate, making this area less impacted by the rate cut.

These rates also benefit our country’s own national debt, since interest on the federal debt is one of the fastest-growing segments of the federal government’s annual budget. Lower interest rates could slow the growth of interest we pay on the national debt.

Now for the not-so-good parts. There are potential negatives associated with lower interest rates that can impact your retirement plan. Lower interest rates on debt are great – but as an investor, lower interest rates mean less earnings on your invested savings. For example, if you rely heavily on interest income from CDs, savings accounts, and money market funds, you’ll probably see a drop in your interest income. Also, once bond investments price in the impact of the reduction in interest rates, your bond investments will yield lower amounts going forward.

Another potential negative impact comes into play if you decide to buy a fixed income annuity, which pays a fixed monthly amount for the rest of your life. The interest earned and the income derived from traditional annuities move in the opposite direction of interest rates, so the payouts from these annuities will likely decrease in the near future.

As I mentioned earlier, how these changes affect you will vary. This is a perfect time to revisit your finances and determine if it presents opportunities for change.

For example, this may be a good time to consider diversifying your sources of retirement income to ensure you have some that are not heavily influenced by interest rates. If you haven’t yet filed for Social Security, review your filing options along with other sources of guaranteed retirement income, such as pensions and annuities.

Consider any outstanding loans you have. And it’s always a good idea to reduce credit card debt, since the rates credit card companies charge far exceed other consumer loan rates, even with the recent rate cut. You should examine whether lower interest rates can make it worthwhile for you to refinance your mortgage or take out a reverse mortgage. Of course, if you believe that future rate cuts are in the cards – which is likely – it probably makes sense to consider waiting. 

Ultimately, a solid retirement system that includes a downside risk mitigation program will be designed to anticipate interest rate and other economic changes like this, and will have the flexibility to adapt easily. 

So as always - be vigilant and stay alert, because you deserve more!

Have a great week.

Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, an SEC Registered Investment Advisor with offices in Falmouth, Duxbury, and Mansfield, MA. Insurance offered through its affiliate, CutterInsure, Inc.

We do not offer tax or legal advice. Jeff can be reached at jeff@cutterfinancialgroup.com. This information is intended to provide general information. It is not intended to offer or deliver investment advice in any way. Information regarding investment services is provided solely to gain a better understanding of the subject of the article. Different types of investments involve varying degrees of risk, including the potential for loss. Therefore, it should not be assumed that future performance of any specific investment or investment strategy will be profitable. Insurance product guarantees are backed by the financial strength and claims-paying ability of the issuing company. Market data and other cited or linked-to content is based on generally available information and is believed to be reliable. Cutter Financial does not guarantee the performance of any investment or the accuracy of the information contained in this article. Cutter Financial will provide all prospective clients with a copy of Cutter Financial’s Form ADV 2A, Appendix 1, applicable Form ADV 2Bs and Form CRS as well as the firm privacy policy. Please contact us to request a free copy via .pdf or hardcopy.