How Should Retirees Invest With the Fed Keeping Rates Low?
The Federal Reserve has moved aggressively to establish low interest rates in response to the COVID-19 economic shock, and the public comments from the central bank demonstrate its willingness to maintain low rates long term. Retirees rely on bond interest to finance basic needs, lifestyle, and healthcare costs once they've stopped working, so low rates represent a major challenge in planning. With limited room for error, retirement investors need to deftly avoid major pitfalls while considering some shrewd and creative allocation strategies in response to the new reality.
Falling rates are going to drive appreciation in existing bond portfolios due to the inverse relationship between interest rates and bond prices. Holders of fixed-rate bonds have experienced this boon, but bond yields and bond fund returns are likely to suffer moving forward. Moreover, the interest income generated in savings accounts, money market accounts, and certificates of deposit will also shift downward. Retirees need more savings to generate the same passive cash flow that they enjoyed prior to the rate crash. That's a major problem for any financial plan that had assumed a certain fixed rate of return, and it forces investors to make some difficult choices.
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Source Fool.com
