Interest Rate Hike: Good News for Retirees?

June 27, 2016

For retirees who rely on bonds, certificates of deposit, and money market funds for income, the Federal Reserve’s recent rate hike could bring some much needed relief, but it’s not the magic bullet many seniors have been waiting for.

Interest rates on financial instruments like bonds and C.D.s, which many retirees rely on as less-risky sources of income, have been near zero since the Great Recession. However, in December, the Fed announced it would raise the benchmark federal funds rate by one-quarter of a point, the first hike in almost a decade.

While the Fed’s higher short-term rate won’t improve things much immediately—it has already been priced into the bond market and is not expected to boost interest rates on products like money market funds—it’s a step in the right direction. The Fed has signaled that it will be cautious about boosting rates any further, but over time, increasingly higher rates could lead to a boost in income for many seniors.

Additionally, higher interest rates could make certain insurance products, like long-term care insurance and annuities, more attractive, since insurance companies base pricing at least partly on bond market returns. This could bring down premiums for long-term care policies—which have spiked quite a bit in recent years—making coverage more affordable for some. Higher interest rates could also boost payout rates for income annuities.

However, the bad news is that, for the time being at least, the increases will likely not outpace inflation. While inflation has remained low for many, it has taken a disproportionate bite out of seniors’ incomes in recent years, thanks to ballooning health care costs. The trend is likely to continue, with inflation rising by two-tenths of a point for the last three consecutive months.

Experts say the rate hike may turn out to be a wash for many seniors, raising incomes slightly but not enough to make a significant difference.