Retirees with debt could see some relief
The Fed's September rate cut was especially great news for retirees or those near retirement who are paying back loans with variable interest rates.
The Employee Benefit Research Institute recently said 66.8% of American families with heads ages 55 or older have some debt. It added, “Furthermore, the percentage of families with heads ages 75 or older having debt, and specifically credit card debt, are at their highest levels since 1992.”
When the benchmark rate falls, banks often pass the savings on to consumers in the form of lower rates on loans.
Borrowers with existing variable-rate loans, including credit cards, home equity lines of credit, and reverse mortgages, should see their rates and monthly payments go down. If retirees see their interest costs fall, they can redirect that money to other things.
Retirees who obtained fixed-rate loans when borrowing costs were at their peak may want to refinance if they plan to keep the asset for a while. They'll need to get a new loan at today's lower rate to benefit from the savings.
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Get StartedHousing and stock prices could get a boost
Fed rate cuts typically stimulate growth. Companies are more likely to borrow to grow when loans cost less. Since older adults often have a good portion of their retirement assets in the stock market, they'll benefit from bigger gains if their investments go up in value as companies expand.
The rate-cutting cycle also contributes to falling mortgage rates, which are already down over a point from their post-pandemic highs. This may increase housing demand if more buyers enter the market and demand exceeds supply. With older homeowners sitting on over $12 trillion in housing equity, the shot of adrenaline to the housing market could help grow their net worths considerably as property values rise. They also stand to benefit if their retirement savings portfolios include real estate holdings.
However, this outcome depends on the economy remaining strong with a healthy job market and rising wages. As Cristal Clarke, luxury real estate director at Berkshire Hathaway HomeServices, pointed out to CBS News, “[More] job losses or [low] consumer confidence might [give] buyers [pause], [even with] lower interest rates.”
Retirees face a big downside too
Unfortunately, it's not all sunshine and roses for seniors. There's one huge downside to a rate cut.
Many retirees like to have a lot of money in safe, conservative investments like bonds, CDs, high-yield savings accounts and money market funds. Unfortunately, these types of investments are going to see yields fall — perhaps dramatically as the Fed begins slashing rates. This hurts their money's ability to outpace inflation.
For example, when comparing CD yields on the Thursday after the Fed meeting, an estimated 4,200 had lower rates than the month prior, according to CD Valet data cited by Morningstar. Rates increased for just over 500 CDs. The number of CDs with at least 5% yields also dropped to under 1,500 compared to 2,057 in August. Likewise, while yields on 10-Year Treasury bonds hit 4.70% in April, they're now down to 4% from that high.
Of course, this doesn't affect existing investments which have locked in higher interest rates and will continue to provide higher returns than new investments.
With fewer safe investments offering competitive yields, retirees may be tempted to take on too much risk by putting more than is safe into the market. Or, those who still prefer low-risk investments may see lower returns. Both groups could find themselves losing ground. Seniors who don't own homes could also be hit by rising housing costs due to increased demand.
Retirees can minimize these downsides by making sure they maintain a diversified portfolio and the right asset allocation — even if that means working with financial experts to achieve it. Those who can should also look into refinancing debt to lower their rate. This can help seniors take full advantage of economic conditions so they can hopefully make their money last for life.
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