Retirement planning can be a complex puzzle to solve, with multiple pieces that need to align for a comfortable retirement.

In recent times, two significant factors have emerged to challenge this balance: rising interest rates and inflation. In this article, we’ll discuss the impact of these economic realities on retirement planning for individuals and the strategies we recommend at Retirement Planners of America.

The debt-free retirement goal

At Retirement Planners of America, we tell our clients, “When our client retires, so should their debt be retired.” We work hard with our clients in pursuit of getting them there by creating a Retirement Cashflow Plan (RCFP), which is a living document that we review twice a year to help reach that goal. If that can be achieved, to a great degree, you’ve mitigated your exposure to interest rates.

Essentially, the goal is to achieve a debt-free status before retirement, thereby minimizing the influence of interest rates on loans, borrowing and debt management. Our strategy is rooted in prevention, as we believe that shielding our clients from the effects of interest rate fluctuations is far more effective than reacting to them once they occur.

Understanding the interest rate paradox

One misconception is that rising interest rates could spell doom for the stock market. However, history shows that this belief is not entirely accurate. In fact, many bull markets have occurred alongside rising interest rates.

The reason behind this paradox is that when the economy is thriving, profits tend to soar, leading to stock market gains. To prevent the economy from overheating, the Federal Reserve may raise interest rates, but this period of rising interest rates often coincides with robust profits.

Therefore, the stock market can be a more favorable investment than bonds during these times.

The impact of rising rates on retirees

For individuals on a fixed income, higher interest rates could be a blessing. It can increase income generated from safer investment options. Retirees often rely on fixed sources of income, such as pensions, Social Security and savings in fixed-income investments.

When interest rates rise, the interest or dividend payments from these investments also increase. This results in retirees earning more money.

However, retirees should also be mindful of potential downsides, such as the impact of rising interest rates on the value of their existing bond holdings.

The bond market conundrum

The current economic landscape has led us to make a significant departure from traditional retirement portfolio allocations of stocks and bonds. We exited the bond market in April 2022, sparing our clients from the substantial losses experienced by some investors.

The recent performance of the bond market, which Bloomberg labeled as the worst since 1787, highlights the speed and magnitude of the Federal Reserve’s interest rate hikes. This bond market volatility has weighed heavily on some 60/40 portfolios, with some down over 20%.

Why a human overlay matters

The old approach of creating a 60/40 portfolio and leaving it untouched, apart from rebalancing and withdrawal of 4% in retirement, is no longer viable in our view. To navigate the complexities of today’s financial markets, we believe it’s essential to have a human overlay to help make informed decisions about portfolio components.

We emphasize the importance of having a sell strategy in place to address the stock side of the equation, particularly during severe bear markets, as was the case in 2008.

The role of human oversight

Having an experienced financial adviser who can help make timely adjustments to your portfolio may be helpful during times of market turbulence. While automated investment platforms can provide some basic guidance, they may not have the nuanced understanding and ability to respond to market dynamics in real time, as an experienced professional human adviser may be able to.

The Investment Committee at RPOA uses our Invest and Protect Strategy, as well as our extensive knowledge of market trends, to help make informed decisions about our clients’ portfolios.

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