Retiring when Interest Rates are Low…What You Need to KnowNovember 14, 2018
How can you ensure a fruitful retirement when interest rates are low? There are several strategies you can use like investing in a treasury bond, or choosing stocks with high history of dividend payments. Learn more.
Many retirees depend on interest income from investments during retirement. But what happens when interest rates are low? When the economy is down, the Federal Reserve often keeps short-term interest rates near zero—good news for borrowers, not for retirement spenders. Luckily there are some strategies retirees can avail themselves of in order to ensure a fruitful retirement.
- Pay off any high interest rate loans, like credit card balances and auto loans. Getting rid of loans with interest rates of 10% or higher can save you a significant amount of interest each year. More money in your savings for living expenses and other incidentals!
- Consider investing in a treasury bond. An investment in a three to seven year bond might yield higher interest than other CDs you might currently own. If you hold these bonds until they mature, you can pick up an extra 1-2% in interest rates with very little risk.
- If you decide to invest in the stock market, choose high quality companies with a strong history of dividend payments.
Things to avoid
Long term certificates of deposit (CDs) - A CD is a savings account that has a fixed interest rate and fixed date of withdrawal, known as the maturity date. You want to be careful with long term CDs because if the economy recovers and interest rates rise, you don’t want to be locked into lower long-term interest rates from earlier years.
Chasing riskier investments in hopes of earning higher returns - Stock investments can pay off, but keep in mind that a promise of a higher return means greater risk! Walk away if you don’t fully understand how an investment works.
High yield bonds - A high yield bond works the same as most other bonds (an investor purchases a bond from an issuer with the assumption that they will get their money when the bond reaches maturity) however with a high yield bond, there is a chance that the issuer may not be able to repay the original principal. For this reason, high yield bonds (sometimes called “junk” bonds) have lower credit ratings and carry higher volatility and risk of default than investment grade corporate bonds, treasury bonds and municipal bonds. They are typically issued by corporations, municipalities or other entities who are experiencing financial trouble.
The draw with high yield bonds is of course the higher yields, but remember that there is a chance you won’t get your money back!
Ensuring a stable retirement in a low interest rate environment might seem like a difficult, discouraging process, but there are plenty of options for you that will ensure you meet your needs.
Questions? Reach out to KLR Wealth Management, LLC.