Monetary Policy's Effect on Retiree Savings

Written By Nicholas Djoulia

Hi Everyone. In this post, we'll explore how the Federal Reserve's interest rate decisions ripple through to the savings and investment accounts that many seniors depend on.

The Fed's Basic Toolkit

Interest rate policy is one of the primary tools with which the United States central bank ("the Fed") fights inflation and stimulates economic growth. When the Fed adjusts the benchmark federal funds rate, which is what banks charge each other to borrow money overnight, that adjustment trickles through the rest of the economy. Whether you're paying mortgage rates or credit card interest or earning a return on your savings account or your bonds, chances are good that an FOMC decision has impacted those interest rates. While these changes are meant to help the Fed stimulate or cool the economy as needed to continue its dual mandate of reaching maximum employment while maintaining price stability, interest rate changes also affect some parts of the population more than others. Retirees, for example

Why Retirees Are Uniquely Exposed

Retirees are on the drawdown phase of their financial life cycle whereas younger investors are typically still in the wealth accumulation phase. This means retirees need their portfolios to support themselves, rather than withstand drastic swings in value. Retiree portfolios are also likely to contain a higher percentage of interest-bearing investments like savings accounts, CDs, and bonds. When interest rates decrease, returns on these savings vehicles decline as well, cutting into retiree income.

The Post-2008 Low-Rate Era

The Fed kept interest rates close to zero for several years after the Financial Crisis of 2008. Their desire to boost the economy meant they were able to support asset prices and generate economic growth. However, it also left retirees who had moved money into very safe investments such as savings accounts and CDs struggling to earn any kind of decent return. This environment has forced many more risk-adverse retirees into riskier investments for income such as dividend stocks or corporate bonds than they would typically be comfortable with.

The Flip Side: Rate Hikes and Inflation

More recently, we have seen the Fed increase interest rates to fight inflation. This has helped seniors to some degree who are sitting on cash savings in interest bearing accounts. On the other hand, high interest rates often come during times of higher inflation or shortly after. So any gains that seniors may receive from higher interest rates could be canceled out by higher prices, especially the price of healthcare which is one of the biggest expenses for seniors.

Why This Matters Beyond Wall Street

Monetary policy discussions get couched in many ways…rising stock markets; Gross Domestic Product growth; but what gets measured matters most to seniors and their communities – the interest paid on that little savings account, the return on that retirement CD or pension fund investment portfolio. That’s why it’s so important for us to understand how what goes on in Washington regarding interest rate policy decisions being made by unelected officials impacts seniors’ financial security across the country.

References

Nicholas Djoulia
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