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Home Finance Higher interest rates are a double-edged sword
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Higher interest rates are a double-edged sword

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Community Advocate Staff
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October 24, 2022
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    By Sharon Longo, Contributing Writer

    While higher interest rates mean increased costs for credit cards, mortgages, and other loans, they also mean that savings accounts, money market funds and CDs will all yield higher amounts.
    While higher interest rates mean increased costs for credit cards, mortgages, and other loans, they also mean that savings accounts, money market funds and CDs will all yield higher amounts.

    REGION – Having some money set aside may provide a sense of security, but many people often feel insecure when it comes to how to actually save that money. Interest rates rise and fall, and the economy can ebb and flow like the ocean’s tides.

    The Federal Reserve, or Fed, which is the United States’ most significant central banking system, raised interest rates from 1.5% to 1.75% in June, which was the largest rate increase since 1994. This economic institution manages and maintains the US money supply and financial transaction system, while setting up monetary policies and overseeing bank operations. They also help maintain financial markets. What a bank charges another bank for an overnight loan is called the Federal Funds Rate, and if this goes up, other interest rates will also follow suit shortly after. 

    The bad news first

    When interest rates go up, this means an increase in credit cards, adjustable-rate mortgages, home equity loans, and other interest-bearing costs. 

    Occasionally, when the Federal Reserve rate goes up, some banks might not raise the yield on savings accounts, or if they do, it might be a small increase.

    When it becomes too expensive to obtain a loan due to a higher interest rate, people spend less money on those big-ticket items like cars or home improvements. Spending less money leads to the economy slowing down, which can hurt company growth and stock prices. 

    With a higher interest rate, people end up paying more for their car, home and items purchased on a credit card. Often, home prices drop due to the decline in demand that comes with increased interest rates, so if a senior is looking to sell their house and reap the benefits of a big profit, it would probably be better to wait. 

    Here’s the good news

    Many seniors live off their savings, and if their cache is earning more interest, that’s a plus. Having money in a savings account that is FDIC insured is considered a safer way to earn a little more interest. The higher interest rates also mean that savings accounts, money market funds and CDs will all yield higher amounts. 

    When interest rates increase, this could bring in more foreign investments, causing the US dollar to become stronger. With a lower interest rate, the rate of return goes down over time. This means having to put aside more from a paycheck to reach that retirement goal. 

    “Retirees are likely to see another sizable increase in their Cost-of-Living Adjustment (COLA) for their Social Security payments in 2023,” due to higher interest rates, says Susan Moore of Moore Financial Advisors in Watertown. Photo/Submitted
    “Retirees are likely to see another sizable increase in their Cost-of-Living Adjustment (COLA) for their Social Security payments in 2023,” due to higher interest rates, says Susan Moore of Moore Financial Advisors in Watertown.
    Photo/Submitted

    “There is an upside to inflation, especially for those who use savings accounts and CDs,” said Susan Moore, chief financial planning officer at Moore Financial Advisors in Watertown. “Online savings banks such as Ally Bank or Synchrony Bank are paying much more than they paid on savings a few months ago. Rates have gone from 0.5 percent a few months ago to 1.5 to 1.75 percent. Also, retirees are likely to see another sizable increase in their Cost-of-Living Adjustment (COLA) for their Social Security payments in 2023.”

    “Based on research conducted by the Senior Citizens League, an advocacy group for retired individuals, a Social Security COLA adjustment for 2023 of 10.5% is possible, which would add an extra $175 per month to the average benefit,” Moore explained. “The last time Social Security benefits rose by 10 percent or more was in 1981. This is generally good news. But for retirees with higher incomes, there are some things to be aware of when income is expected to rise in the coming year,” she noted. “The boost might result in having to pay more in Medicare premiums and for prescription drug coverage due to the Income-Related Monthly Adjustment Amount (IRMAA).”

    Be sure to talk to a financial planner or look for a retirement calculator to see how any investments dependent on interest rates are affecting your specific investment plan. Higher rates may make it easier to achieve your goals. But when rates are lower, waiting too long could make it more difficult to recover from any losses suffered. If possible, if you’re still trying to build your retirement savings, consider contributing more each year to help reach that savings goal.

     

    RELATED CONTENT: 

    Are annuities right for you? (fiftyplusadvocate.com)

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    Post Views: 28
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