The Fed raised rates — retirees and near-retirees should do this

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Retirees have to watch their spending, especially after the Federal Reserve’s latest rate hike announced on Wednesday. 

For the third time in a row, the Federal Reserve said on Wednesday it would raise the benchmark federal-funds rate – this time, by a 0.75 percentage point so that it hovers between 3% to 3.25%. Officials suggested this would not be the last time this year, and to expect the rate to jump to around 4.4% by the end of 2022. 

The news may seem unsettling for retirees, in particular, many of whom are living on fixed incomes. Increasing the federal-funds rate is the Federal Reserve’s attempt to combat inflation, but many Americans are trying to do that themselves – while also handling the stresses of market volatility. In recent years the economic environment has felt unnerving at times for retirees, as well as retirement savers: market volatility has pushed 401(k) balances down, while rising inflation has made everyday expenses such as groceries and gas much costlier.

The Federal Reserve said higher interest rates will usher in other examples of “pain” for Americans, including a slowing economy and a rising unemployment rate. 

See: Fed’s tough task: History shows inflation takes average of 10 years to return to 2%

The first thing to watch out for is spending, said Kelly LaVigne, vice president of advanced markets and solutions at Allianz Life. Companies have tried to catch up by producing a lot of inventory, and a slowing economy might make them competitive to sell their products with “tempting prices,” he said – those sales may be alluring, but retirees and retirement savers alike should be protective and curb any bad spending habits, LaVigne said.  

U.S. stock indexes turned downward shortly after the Federal Reserve’s latest announcement.  

Volatility can be hard to stomach, especially for someone whose nest egg is tied up in an investment portfolio, but retirees and near-retirees are often told to stay the course. “In reality, we need to protect ourselves from ourselves,” LaVigne said. That includes sticking to a retirement plan, and balancing risk tolerance with one’s time horizon, financial assets and needs in as rational a manner as possible. One way to stay calm in the midst of volatility: don’t look at your portfolio too often, experts have said.

Also see: Ray Dalio says stocks, bonds have further to fall, sees U.S. recession arriving in 2023 or 2024  

Americans may also want to take this time to tackle any credit card debt, as the rate hike will affect higher-interest debts, and check in with their banks about savings account interest rates, which will also rise as a result. 

Now is the time for anyone in or near retirement to consider multiple streams of income if they haven’t already. For some Americans, that may simply be a retirement portfolio and Social Security benefits. For others, it could be a pension, or an annuity, alongside personal retirement savings. Many retirees have taken to part-time work in retirement as a way to bring in extra cash and preserve their investments, while other older Americans who were forced to retire during the height of the pandemic are pursuing “unretirement,” where they re-enter the labor market. 

Extra income streams are helpful in the present, since it allows investors to keep their investment portfolios untouched (giving those investments time to rebound from market volatility), but it will also be a boon to future retirement security if savers continue contributing to a retirement or investment portfolio to use later in life when the cost-of-living inevitably rises. Retiree healthcare expenses have historically climbed year after year, and are expected to continue to do so, for example. 

Regardless, retirees should take stock of how they’re feeling right now with the latest rate hike and keep it in mind if the Federal Reserve increases the rate again later this year, LaVigne said. “Look at where you are right now,” he said. “Remember what this feels like and try to plan ahead.”

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