What interest rates mean for retirement planning – Yahoo Finance

Katharine George, Wealthstream Advisors Financial Advisor, joined Yahoo Finance Live to discuss interest rates and what they mean for retirement planning.

Video Transcript

SEANA SMITH: It’s time for our retirement series, brought to you by Fidelity Investments. And for that, we want to bring in Katharine George, financial advisor with Wealthstream Advisors. And Katharine, I was actually just making some adjustments to my 401(k) today. So this conversation feels very timely on my end. But let’s talk about the big events happening this week. We heard from Jay Powell. He had some comments on inflation, also some comments on the taper timeline. Big question here is, how does this, how should this affect people’s retirement plans?

KATHARINE GEORGE: Well, ultimately, retirement plans are long-term plans, where we’re planning out for 40, 30 years into the future. And really, they should automatically be taking into these types of considerations. So, in terms of interest rates, interest rates rising is actually going to be a good and healthy thing for bonds over time. When we think about our retirement plans and having a stock and bond mix, stocks will really be our growing force, what outpaces inflation. And the bonds are the security.

Right now, interest rates are pretty low. But as interest rates rise, there’ll be some short-term pain, kind of like a flu shot. There’s going to be some short-term pain. But you’re overall healthier. And that’s how we think about these interest rate rises. In the short term, though, as long as you have a plan in place, there’s not too much to change.

ADAM SHAPIRO: Hey, it’s Adam Shapiro here with lots of computer problems. It might be internet connection. I’m curious, when we look at retirement saving, you know, if you’re in your late 50s, early 60s right now, and you’re looking at protecting some of this investment that you’ve built up in a 401(k), interest rates now are terrible. Annuities seem to be the only way, though, to protect a portion of your retirement. So what do you do?

KATHARINE GEORGE: Well, so annuities are actually– so they are– since the interest rates are so low, annuities won’t keep up with inflation. So while you have that stability and that security, it probably isn’t as good as an investment as bonds. So even though bonds are still low interest rates, when interest rates rise, you’ll get that– you’ll get higher rates of inflation, whereas an annuity, if you purchase one now or you purchased one last year, you’re kind of stuck with the payment that you’re getting.

So I would say bonds are really the protection of the portfolio, and stocks are the only thing to give you that growth. And, you know, when you’re in your 40s or 50s or your late 50s, and you’re thinking about how to protect yourself, ultimately, what I always go to is cash.

So any portfolio is going to have a bumpy ride, and if you’re close to retirement and you want to secure– that you don’t have to touch any of your savings that are growing and that will have that bumpy ride, making sure that you have enough cash on hand will be the saving grace. And if the market tumbles and you’re in a bind if you lose your job or you need to retire early, that cash will really come in hand.

SEANA SMITH: Katharine, what about if you’re in your 30s or 40s so you still have a ways to go before retirement? I guess, how much of a cash reserve should you have then?

KATHARINE GEORGE: Well, it depends on lots of different factors. Are you saving for a home? Are you going to need a car in the next few years? These types of things will alter that suggestion. But, you know, probably something like six months of cash is always a safe bet of your rent, you know, these expenses that you know you’re going to have on a monthly basis. But it all depends.

When I think about a stock and bond mix, I think about three things. It’s your required rate of return, so what rate of return do you need to earn to meet your goals? It’s a little harder to determine when you’re younger. Your time horizon, so if you’re buying a home, your time horizon is actually pretty short, even if you are in your 30s. But in a retirement plan, you have such a long period of time before you’re going to touch it if you’re younger that you can actually be riskier and ride out the ups and downs without having to worry about it because you don’t have to touch it.

And the third one is your risk tolerance. So will a market downturn force you to pull all your money out because you’re nervous? And that would kind of alter that stock to bond mix, too. But those are the three factors that I think about.

ADAM SHAPIRO: Explain to us what you think would be the more important question– and if they’re both off base, what is the right question? But when a 45-year-old walks into the office and says, I’m planning for retirement. Is the question, OK, how much income do you want to kick off every month when you’re in retirement? Or is the question, how much of a nest egg do you need to build? Which is more relevant?

KATHARINE GEORGE: So I think life changes. And I think being prepared for all of these changes is key. But not only income in the portfolio, but capital appreciation. It used to be a time where we thought about stocks growing off dividends and living off bond interest. But now, you really also need to think about the capital appreciation of your stocks.

But it comes down to standard of living. You know, what do you want to spend in retirement? What is your lifestyle going to be like? And do you have any other goals? Do you want a second home? Are you going to leave assets to family members? These types of things will all affect kind of the portfolio or the plan in place.

SEANA SMITH: Katharine George of Wealthstream Advisors, thanks so much for joining us. Have a good weekend.