How Will Rising Interest Rates Affect My Retirement?

Rising interest rates will affect your 401(k), IRA or other retirement plan. Understanding how rising interest rates affect stocks, bonds and other investments can help you manage your plan. Keep your focus on your long-term retirement strategy to allow yourself to respond to interest rate changes.

Terry Turner, writer and researcher for RetireGuide
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APA Turner, T. (2022, June 13). How Will Rising Interest Rates Affect My Retirement? RetireGuide.com. Retrieved June 27, 2022, from https://www.retireguide.com/retirement-planning/investing/risks/rising-interest-rates/

MLA Turner, Terry. "How Will Rising Interest Rates Affect My Retirement?" RetireGuide.com, 13 Jun 2022, https://www.retireguide.com/retirement-planning/investing/risks/rising-interest-rates/.

Chicago Turner, Terry. "How Will Rising Interest Rates Affect My Retirement?" RetireGuide.com. Last modified June 13, 2022. https://www.retireguide.com/retirement-planning/investing/risks/rising-interest-rates/.

How Will Rising Interest Rates Affect How You Should Plan Your Retirement?

Rising interest rates affect different types of retirement savings and investments in various ways.

Depending on the type of investments you have in your 401(k) or other retirement plan, rising interest rates may have a positive or negative effect. How you react to them can also be one of the more serious risks in retirement.

It’s important to diversify your retirement savings to get the most out of your retirement plan.

Pros of Higher Interest Rates for Retirees

Fixed-income investments tend to benefit from higher interest rates. Their yields — the value they gain — tend to rise when interest rates go up. These are investment options that typically provide a steady income stream. They also typically have lower risk than stocks.

Examples of Fixed-Income Investments
  • Certificates of deposit (CDs)
  • Corporate bonds
  • Government bonds
  • Money market funds

Annuities generally benefit from higher interest rates. That’s because the insurance companies that sell annuities invest their money in mortgages and other loans. As interest rates increase, the insurance companies also raise the rate on annuities.

As a result, if you buy an annuity after interest rates have been increasing, it will pay you more than if you bought one when interest rates were low.

Cons of Higher Interest Rates for Retirees

Higher interest rates tend to hurt stocks.

The traditional advice is to move investments in your 401(k) or other retirement plan out of stocks and into bonds, mutual funds and other fixed-income investments.

Higher interest rates are connected to rising inflation. Interest rates typically rise to control inflation. So, if interest rates are rising, the growth of all your investments will be further eroded by higher inflation. But moving savings to investments that perform better from high interest rates can minimize the damage.

Impact on Real Estate

Rising interest rates translate into higher mortgage rates for new buyers. If you have a fixed-rate mortgage, your rate stays the same.

Typically, higher interest rates — and subsequently higher mortgage rates — force home prices down.

If you’re nearing retirement and planning to sell your house — to move or downsize — then higher interest rates may make it harder for you to find a buyer. It may also force you to lower your asking price.

You’ll also likely have to pay a higher mortgage rate on your new home.

But historically, real estate has been a good hedge against inflation, which triggers higher interest rates. With a fixed-rate mortgage, you are effectively paying the same amount of money each month even as interest rates and mortgage rates rise.

Impact on Your 401(k)

Rising interest rates affect stocks and bonds in different ways.

Stocks historically lose value during times of higher interest rates. Bonds and other fixed income investments tend to perform better. This trend tends to reverse itself when interest rates start falling again.

What You Can Do to Keep Your Retirement on Track During Rising Interest Rates

There are several steps you can take to keep your retirement planning on track during times of rising interest rates. Regardless of your age or how much you have put away into retirement savings, it’s important not to panic.

Take your time to assess what interest rates are likely to do to your retirement investments. Look at what your reaction to rising interest rates will do in the long term to your retirement savings. Talk with your financial advisor about the best course of action for you.

Steps You Can Take to Stay on Track with Rising Interest Rates
Consider fixed-income investments
Fixed-income investments — money market accounts, CDs, corporate and government bonds — perform better when interest rates rise. Converting stocks to CDs can be done on a short-term basis, so you can move the investment elsewhere relatively quickly when interest rates fall.
Consider non-rate-sensitive stocks
While stocks tend to fall when interest rates rise, some historically perform better. Food, utility, consumer goods and energy stocks don’t tend to be as sensitive as other stocks to changes in interest rates.
Review your portfolio
Check how you have balanced investments in your 401(k) or other retirement plan. With two decades of stable interest rates, you may have moved most of your investments into stocks and out of bonds, for example. You may want to adjust these investments to better react to rising interest rates.
Take advantage of higher rates
Higher interest rates drive up the rates that annuities and savings accounts pay you. Putting money into a high-yield savings account or an annuity after they bump up their rates can give you a bigger return than you would have gotten if you’d acted a month earlier.
Don’t panic
Watching the stock market fall with each rise in interest rates can make a lot of people nervous. Don’t panic and make sudden, dramatic changes. Keep your eye on the long-term strategy and goals of your retirement planning.

Beware of Trying to “Time the Market”

With annuities and some other financial products that benefit from interest rate hikes, there may be a temptation urge to “time the market.” In this case, that means to wait until interest rates peak before buying an annuity when the rate of return peaks.

Timing the market is difficult to do and financial advisors tend to warn against trying it.

As interest rates rise for annuities, the rate of return that insurance companies offer on their annuities rise in response.
Waiting to buy an annuity until rates max out means you won’t be contributing to it during your wait. That’s money that isn’t benefiting from an already higher rate.

You may want to consider something called annuity laddering. Instead of putting all your money into a single annuity, you divide up your investment cash and purchase multiple annuities periodically as rates increase over a year or more.

Last Modified: June 13, 2022

6 Cited Research Articles

  1. Dore, K. (2022, May 9). More Than Half of Americans Say Inflation May Have a “Big Negative Impact” on Long-Term Financial Goals, Survey Finds. Retrieved from https://www.cnbc.com/2022/05/09/americans-say-inflation-may-have-a-big-negative-impact-on-goals.html
  2. Malito, A. (2022, May 7). The Fed Raised Interest Rates — What to Do Now With Your Retirement Portfolio. Retrieved from https://www.marketwatch.com/story/the-fed-raised-interest-rates-what-to-do-now-with-your-retirement-portfolio-11651812684
  3. Rosen, A. (2022, May 5). How Will Mortgage Rates Impact the Real Estate Market and Your Retirement Accounts? Retrieved from https://www.forbes.com/sites/andrewrosen/2022/05/05/how-will-mortgage-rates-impact-the-real-estate-market-and-your-retirement-accounts/?sh=31b75ba35215
  4. Dore, K. (2022, May 4). Here’s How Much Cash Retirees Need to Weather a Stock Market Downturn. Retrieved from https://www.cnbc.com/2022/05/04/heres-how-much-cash-retirees-need-to-weather-a-stock-market-downturn.html
  5. Leonhardt, M. (2022, May 4). The Fed Just Rates by a Half Point. Here’s What Financial Advisers Think You Should Do With Your Money. Retrieved from https://fortune.com/2022/05/04/financial-advisors-on-what-to-do-with-money-after-fed-rate-hike/
  6. TIAA. (n.d.). How Rising Interest Rates May Affect Your Retirement Plan. Retrieved from https://www.tiaa.org/public/pdf/how_rising_rates_may_affect_your_retirement_plan.pdf