The Federal Reserve has been raising interest rates the past few months, and those changes have ramifications throughout the economy. Your retirement accounts are no exception. How do these changes impact the interest on retirement savings? That depends on what kinds of investments you hold in those accounts. Here are some of the changes you might see.
Your Stock Valuations May Drop
First of all, there are no guarantees in financial forecasting. That said, in general, higher interest rates correlate with lower stock values and vice versa. After an 18-month bull market, the Fed raised interest rates to help fight inflation. That’s led to losses in the stock market. So, if you’re holding a lot of stocks in your 401(k), you’re probably seeing your 401(k) interest rates decrease.
Keep in mind that you should expect volatility in the stock market, and a well-balanced portfolio will give you the right mix of stocks, bonds and cash based on your age, expected retirement date, goals and risk tolerance. Remember that you don’t lose money unless you touch it. When you keep your portfolio on track with your plans, you give your investments in stocks the time they need to recover and regain their value.
Bonds May Take a Hit as Well
How do bonds factor into your retirement account interest? Long-term bonds are more sensitive to changes in interest rates. Because you hold long-term bonds for a more extended time period, 10 years or more, there’s a bigger chance that interest rates will change during their timeframe. Rising interest rates mean bond prices can drop.
Short-term bonds can see their prices fall with rising interest rates, but their shorter timeframes — typically one to three years — mean the impact isn’t as significant. That’s because when they mature, you can simply move the money into a new bond with a higher rate. Learn more about short-term bonds and the impact of inflation.
As you might expect, the effects on intermediate-term bonds, which you may hold from four to 10 years, fall somewhere between the harder hits on long-term bonds and the less dramatic impact on short-term bonds.
Fixed-Income Accounts May Be More Attractive
Savings accounts, mutual funds, annuities and other fixed-income accounts benefit from higher interest rates. In recent years, many of these accounts paid almost nothing, so you may have ignored them as investments. Now, with interest rates rising, it might make sense to revisit fixed-income accounts as part of your retirement portfolio.
Keep in mind that annuities typically aren’t only affected by interest rates. They also generally return some of the principal you paid and include survivor credits. So, they won’t fluctuate as much with rising or falling interest rates.
The Bottom Line
If you’ve carefully planned your retirement investments, avoid the temptation to time the market to try to boost your returns. Seeing your stock values decline may be worrisome, but the right mix of stocks, bonds and cash should keep you on track.
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