The Federal Reserve recently announced its expectation to lower interest rates in September, marking a significant shift in monetary policy. This change could have far-reaching implications—namely to your retirement finances if you rely on money market accounts, CDs, and savings accounts.[1]
The Impact on Money Market Accounts
Money market accounts, known for their stability and relatively higher yields compared to traditional savings accounts, may soon see a decrease in their interest rates. As the Fed cuts rates, financial institutions that offer such accounts typically follow suit, adjusting their offerings to align with the new economic landscape
As an example, bond rates have already been falling in anticipation of rate cuts. This year, the 10-year Treasury bond peaked at 4.7% in late April. Since then, it has hit a low of 3.7% on August 21st. While a 1% drop in the rate may not seem significant, this represents a 21% decrease in the rate. What would a 21% decrease in the interest you receive mean to your money market accounts?
What does this mean for you and your money market accounts, CDs, and savings accounts? Quite simply, the interest rate you receive will most likely be decreasing.
Many retirees utilize money market accounts as a relatively safe place for their funds, given the balance they offer between accessibility and returns. However, the anticipated rate cuts could lead to a lower return on investment for these accounts, potentially disrupting carefully laid financial plans.
The Inflation Factor
Compounding this issue is the persistent presence of inflation. While inflation has moderated from its recent peaks, it remains a significant factor in economic calculations. As of July 2024, the Consumer Price Index (CPI) rose by 2.9% compared to the previous year. This is a good sign that inflation is slowing, but costs overall have still risen 20+% over the last few years. This means the 5% money market rate you receive today is more like 2.1% after inflation, and even less after you pay taxes on that interest.[2]
Time for Portfolio Reallocation?
Given these circumstances, you may want to consider reallocating your funds from money market, savings, and CD accounts to other investments. The bond market and corporate bonds are once again in favor. As bond prices and interest rates have an inverse correlation, decreasing interest rates typically lead to higher bond prices. With Corporate bonds currently yielding in the 4-6% range, they may offer a solution. There are plenty of strategies we utilize on a daily basis that can help you receive the return you seek while balancing the risk tolerance you seek.
A Financial Professional Can Help
Given the complexity of these financial decisions and their potential long-term impact, consider consulting with a financial advisor on how you can execute a rebalancing of your finances. An expert can help tailor a strategy that balances the need for income, growth, and security based on individual circumstances and risk tolerance.
While the potential lowering of interest rates poses challenges for retirees relying on money market accounts, it also presents an opportunity to reassess and potentially optimize financial strategies. The professionals at Martinelli Financial Services have been proactive in helping folks like you maintain financial security in these uncertain times. Reach out to us today to take one step closer to the financial security you deserve.
