Retirement Planning When Interest Rates Are Falling

You may feel tempted to reallocate funds away from cash equivalents to seek higher returns in retirement, but this shift means taking on more risk. Rather than making abrupt changes, talk to a financial advisor who can discuss whether you might benefit from small adjustments without increasing overall risk.

Stocks, Bonds and ETFs

Bonds are typically a go-to for investors nearing or in retirement because they provide steady income. However, when interest rates fall, bond yields also decrease, impacting the income investors can earn.

Long-term bonds may experience price appreciation as rates drop. This appreciation offers benefits if you hold bonds for capital gains rather than income. However, bonds with shorter durations may not benefit much from price gains.

If you rely on bonds as a primary source of retirement income, consider the types of bonds you hold. Diversifying with a mix of short- and long-term bonds or government-backed and corporate bonds can provide a buffer against income decline.

Stocks are inherently more volatile than bonds or cash but can offer growth potential even in a low-interest-rate environment. When interest rates fall, companies can often borrow at lower costs, which may lead to higher profitability, benefiting stock prices.5

Another investment option in a low-interest rate environment is dividend-paying stocks. Investing in companies that pay regular dividends in sectors like consumer staples and utilities can help offset the loss of income from bonds and interest-bearing accounts.6 (One caveat, though: If you are retired or close to retirement, holding a large portion of your assets in stocks is risky. Work with a trusted financial advisor to make sure you're not over-exposed to stock market risk for your age, retirement goals and financial situation.)

Non-Traditional Assets

Real estate, commodities and precious metals can be beneficial in a low-rate environment. Real estate, for example, tends to perform well with lower borrowing costs, potentially increasing property values. Commodities like gold may also appreciate as investors seek alternatives to bonds.

Annuities are another option, as they can provide guaranteed income in retirement. However, in a declining interest rate environment, but annuity payments tend to edge down when the Fed starts cutting interest rates.

If you buy a fixed annuity when interest rates are low, you lock in lower payouts for life.7 There are alternatives, such as variable annuities with a guaranteed minimum withdrawal benefit or indexed annuities.

All of these alternatives are complex and sometimes illiquid. It’s a good idea to discuss them with a financial advisor who understands the asset types and your specific needs.

Stay Diversified and Focus on Long-Term Goals

With declining rates, you might be tempted to shift your portfolio to riskier assets to chase returns. However, increasing exposure to high-risk investments close to or during retirement can jeopardize financial security if the market declines. While adding a small allocation to growth assets like stocks can make sense, it’s essential to weigh the risks carefully.

Diversification remains a key strategy in managing investment risks, even in a low-interest rate environment. While certain assets may not perform as well when rates go down, a diverse portfolio protects against market fluctuations and preserves income stability.

Consult a trusted financial advisor to evaluate your current asset allocation and consider whether you need adjustments to weather the return to a low-interest-rate environment. With thoughtful planning and professional guidance, you can continue to build a stable, sustainable financial future in any economic climate.