Planning for retirement is never a “set it and forget it” activity. There are unexpected disasters, market drops, and changing laws that invariably cause retirees to reevaluate their plans of action. Recently, the Federal Reserve’s statements regarding interest rates and inflation, as well as the GameStop stock frenzy, may have you wondering how to respond. Let’s look at three events that could show the future of your finances.
The Federal Reserve’s Latest Meeting
The Federal Reserve met at the end of January and issued several important statements. They said they would keep interest rates at near-zero for some time and double down on their commitment to buy large amounts of bonds each month.[1] Unfortunately, savings accounts and CDs will yield very low rates, which may make it difficult for retirees who keep their money in them to receive a reasonable rate of return and make their savings last throughout retirement. However, there may be financial products and strategies aimed at earning a reasonable rate of return despite low interest rates, such as an annuity and or a tailored investment plan.
The Potential For Higher Inflation
The Fed also said that there is potential for ‘transient’ inflation in the coming months and that they would allow inflation to rise above 2% for some time.[2] While many economists don’t think we’ll return to the double-digital inflation rates of the ’70s, despite recent significant government spending, even slightly above average inflation can eat away at retirement savings over time. For example, after 20 years with a 2% inflation rate (the Fed’s “target” interest rate), $1,000,000 would only have the buying power of $672,971.[3] Retirees may need to focus on combating the eroding effects of inflation, which could be substantial over the course of decades.
Traditional Rules Don’t Always Apply
You may have been as surprised as anyone when GameStop’s stock skyrocketed and became the focus of the news for a few days. Traders who frequent an online forum called “WallStreetBets” borrowed shorted stock and rallied members of the forum to buy shares to drive up the stock. From there, those who shorted the stock had to buy it back at much higher costs, losing out. It was the opposite of “business as usual.” Even if you weren’t affected by this event, you might ask yourself how your portfolio and retirement plan would stand up to a major market or personal finance setback. We can’t always rely on a traditional model when it comes to retirement, whether that’s a guarantee that we’ll be able to work as long as we want or that our investments will work out the way we planned.
If you’re looking to revise your retirement plan based on these three events that could affect your finances, we can help. Inflation, low interest rates, and market volatility are just some of the things your retirement plan needs to prepare for. The good news is that there are ways to plan. We offer complimentary financial reviews so we can meet to discuss your risk tolerance, retirement income plan, and unique financial planning needs.
[1] https://www.bankrate.com/banking/federal-reserve/interest-rate-pause-biggest-winners/
[2] https://fortune.com/2020/12/07/investors-inflation-2021-labor-market-mirage/
[3] https://www.buyupside.com/calculators/inflationjan08.htm
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