Could Rising Rates Risk My Retirement?

Today, we’re discussing the subject of rising interest rates and their potential impact on your retirement. As you know, we’ve been experiencing a rising interest rate environment for some time. The Fed will pause that rise at some point but possibly continue later. Eventually, they will finish where they feel they’ve accomplished their goals. Today I want to cover a critical question; could rising rates risk my retirement?

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Having enough income in retirement is essential to allowing you to do amazing things with the people you love at the places you love. As you prepare for retirement, you should seriously consider the question, “Do I have enough income?”

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Of course, at Lord and Richards, we help you build a comprehensive plan called a financial independence review. This plan is a road map that is tested and secure so you can retire without worry. But now, many people are concerned that their plans won't be able to stand up against record inflation and rising interest rates. Are there ways to take income in retirement that won’t be as sensitive to rising rates?

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I want to talk about what I typically see in people’s portfolios. Most portfolios that people bring in for us to test and review in our financial independence review have some combination of stocks and bonds. Some of you may have another type of investment, but stocks and bonds are the staples of most people’s portfolios. Folks have been told for years that a good combination of stocks and bonds will provide an excellent mix of growth and safety. But are bonds the safest alternative in a portfolio?

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In 2022 and 2008, we learned that bonds are not a 100% safe solution. Their pricing changes, and so does the value of your portfolio, depending on how the interest rates go. In 2022 we learned that if you’re in a low-interest rate environment and taking income from your investment in bonds when the Fed raises rates, your good old-fashioned low-interest rate bonds won't be attractive to new investors. When it comes time to unload them, you may not receive a return on your principal. The value of your underlying investment, not just the interest, can decrease significantly. Last year, people who depended on bonds for safety saw their bonds drop in value, sometimes as much as 25%. That changes how we view bonds now. Bonds are interest-rate sensitive regardless of whether we label them risky or safe. If bonds and the stock market go down simultaneously, the value of your whole portfolio could plummet, and too many people have experienced situations like that.

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However, there is some opportunity on the backside. If you hold on to bonds with good interest rates, and rates start going down, your bonds look very attractive to those looking to get into bonds. Bonds can offer rewards but also significant risks. Whether you have a one-year, thirty-year, or even a rare hundred-year bond, not only is the value of the bond at risk but so is your entire portfolio because its value will fluctuate with changing interest rates.

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Now, let’s look at income. Maybe you have a good interest rate on a bond, and you want to enjoy that and use it as your source of income. Maybe it’s a three, five, or ten-year bond, and you’re receiving between 3-5% on that bond. When interest rates change, and you have to renew, you’ll find yourself at a much lower rate, and your income will suddenly drop.

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You must understand the risk. The first risk is your principle. Your principle is at risk in bonds, even in supposedly low-risk bonds. Bonds are not what we at Lord and Richards consider a protected asset. Secondly, if you depend on bonds as a source of income, your income is at risk.

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What’s the alternative to bonds? When we make a comprehensive financial plan for you, or any of our clients, we want to make parts of the portfolio that eliminate most of the risk you would face in either stocks or bonds. We address how to do that in the next article; we’ll talk about better alternatives to bonds for investing the safety-focused portion of your portfolio and better ways to generate consistent income. The good news is those options do exist, but integrating them is only possible within a comprehensive financial plan.

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Ultimately, bonds aren’t a perfectly safe and consistent part of your portfolio. No matter what you’ve heard, the value of bonds can often be unstable. For example, in 1981, the target interest rate was 20%. That would be great as an investor, terrible as a borrower, and even worse for the value of your bond portfolio! But bonds can be part of your plan if they’re worked into a total comprehensive plan for financial independence.

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Next time, we’ll cover alternatives to investing in bonds for financial safety and income. In the meantime, I would love to talk with you about how you can achieve financial independence. At Lord and Richards, we’ve helped many people like you through our financial independence review. We want to sit down with you and discuss your goals, values, dreams, and what kind of life you want to live when you retire. Then, we can come alongside you and help you build a plan to achieve financial independence so you can retire without worry and do amazing things with the resources God has put at your disposal. It all starts with a simple phone call.