Interest rates can impact investments and more importantly your retirement. Join Johnathan and Melissa Rankin as they discuss what rising interest rates affect and how to prepare for them.
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- Johnathan Rankin CRPC® CEPA®, Founder & CEO,
- Melissa Rankin - Wealth Management Advisor
- Theorem Wealth Management, Financial Advisor Dallas Texas
- Retire Once Show - 2022 Retirement Podcast Series
00:00 - Intro
2:14 - Why are interest rates rising?
4:42 - Bond in a rising interest rate environment
8:08 - Stocks & rising interest rates
12:56 - How rising interest rates affect retirement plans
17:09 - 401ks
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Disclaimer: Johnathan Rankin is a Registered Representative of Sanctuary Securities Inc. and an Investment Advisor Representative of Sanctuary Advisors, LLC. Securities offered through Sanctuary Securities, Inc., Member FINRA, SIPC. Advisory services offered through Sanctuary Advisors, LLC., an SEC Registered Investment Advisor. Theorem Wealth Management is a DBA of Sanctuary Securities, Inc. and Sanctuary Advisors, LLC.Music Song: Can't Get OverArtist: Ballpoint/Epidemic Sound
With inflation at decade highs, the feds began to raise interest rates in attempt to slow down that inflation. But what does this mean? And what do rising interest rates mean for your retirement? All that and more on today's episode of the retire. Want show?
Hello and welcome to the retire. Once show, show designed to help you get to retirement, but most importantly, stay retired. I'm your host, Jonathan Rankin. I'm the founder and CEO of theorem wealth management. And I'm joined by my lovely co. Hi, I'm Melissa Rankin. And today we're going to talk about interest rates and I kind of think back now when, uh, when I first started this business, my very first client, 15 years ago, walked into the office.
And the investment that we bought at the time was a nine month CD. Guess how much it was yielding? I don't know, 15 years ago, nine months, maybe three, 4%, five and a half percent. For nine months, that'd be nice. It would be nice. And, and that's where I know a lot of retirement investors, at least a lot of our listeners would love to get to at some point, but right now, so what I have right now with everything going on with inflation, with, you know, the, the Fed's actions, you know, they're trying to, you know, raise interest rates and really it's an attempt to curb that, uh, that inflation.
Yeah. Eventually we're going to get there, but there's a lot of steps between, you know, where we're at today on nine months, CD and, uh, and five and a half. Yeah. So we've got, so we're going to, that's what we're going to go through today. We're going to talk about rising interest rates and really what does that mean for your retirement?
But before we jump into that, a couple things we want people to do right now. Yes, absolutely. What do we want them to do? I want them to like us five stars, five stars. If you're listening on. Podcast platform, click the subscribe button, subscribe button. And if you're watching us on YouTube hit the like button hit that subscribe button.
That way you're notified. Every time we come out with a new, new, up a new episode. So that's what we've got in store for you today. Uh, those are the things we need you to do, but, uh, let's dive right in rising interest rates. Ah, you know, as a topic that we hear about often, I mean, why are interest rates rising?
Yes. As we had talked about the, the fed is raising rates right now because inflation and really, I mean, prices are out of control at this point. We're seeing price increases. Prices are rising faster than they have in 40 years. And so, because of that, what the Fed's doing is they're raising interest rates to make borrowing much more expensive.
So. People save more, you know, there's less money circulating in the system. So that way we have slower growth and lower inflation to tighten those purse strings, they are trying to tighten your purse strings. Now, the funny thing is that the feds wanted inflation since 2009, since the financial crisis they've been begging for inflation, it was always, that was their target.
That's why they kept rates extremely low. And so now that it's, we've got. You know, bout of inflation now it's almost, it feels like a panic of sorts to say, well, we've got to raise rates and, and stop this inflation that we were begging for over the past 13 years. So that's really why they're why insurance are rising right now.
Okay. So let's shift gears a little bit now that we know why let's talk about how it affects your portfolio. Let's start with cat, let's start with cash. So as a, as I mentioned at the top of the show, CDs are not getting you five and a half percent right now. No. Um, By looking at cash balances. A lot of our clients, a lot of retirees use cash and cash alternatives in that short term bucket strategy, you know, for their, their immediate use.
And at some point, my hope is that we're going to see savings rates get back to a decent level where you're actually earning something on the cash you have in the, uh, in a money market. I think we'll ever get back to that five and a half, maybe at some point, I don't know. That's like a crystal ball. I do not have a crystal ball, uh, but we haven't seen cash rates rise just yet on savings accounts, but we have started CCDs creep back up.
Now, when I say creep back up, I mean, A little bit from where they were at the floor, not anywhere near those, uh, those levels 15 years ago. So we've got a long ways to go until they're back to those levels, but we're starting that right direction, which is what most retirement investors are looking for. I want to be able to be conservative, put my cash somewhere, but I still want to earn something, especially with all this inflation and prices getting more expensive.
If I just put my money into. It's not doing anything for me to keep pace that inflation. So it'll get there. It's just going to take some time. Okay. So if cash is going to take some time, CDs are going to take some time. What about something that's not quite so immediate? What about bonds? So bonds in a rising interest rate environment that is, uh, that is a recipe for disaster and that's kind of what we're seeing right now.
Bonds do not hold up well in a rising interest rate environment. And you know, the reason why is that bond prices and interest rates are inversely. What do you mean by that? Is that as interest rates rise, the price of bonds fall. So think about it like this. The reason why that happens is that if you've got a bond that you bought, let's say a year ago, and it was yielding you 3%.
Well, the new bonds that are coming out for the same, you know, risk, the same duration are now at 4% and bonds to 3%, he wants a 3%. So for you to sell that, you're going to have to offer that at a. So the way I like, uh, I like clients to think about this is if you have bonds as rates go up, think of those bonds.
They're used bonds. It's kind of like a used car, you know? And how much are you really going to pay for a 2005 Toyota Camry? If, you know, the new Toyota Camrys are coming out, you're not going to pay the same price. You're going to have to sell yours at a discount. Whereas when rates go down, now that bond that you had, that's a collector's item.
It's like, uh, you know, 1964 months. Yup. At least I think I'm not a car guy. So I'm going to assume that his car knowledge right there. All I keep thinking about is that gone in 60 seconds, that Shelby GT Mustang, I think the name of the car was Eleanor. If I remember correctly. Oh, I do remember Eleanor, but, uh, that's, that's the way you want to think about interest rates and bonds as insurance go up.
You've you've got a, you've got to use. And you need to sell it a discount. Yep. And if you rates go down, you're going to have a collectors item on your hand because the new bonds that are coming out, they're not offered. You know, that rate that you got yours at. So that's the, that's really the reason why we've seen bonds so far this year really have a hard time performing.
I mean, they're down, you know, as of, uh, us recording this show down over 5% year to date. Okay. So with that in mind, why would you even own bonds? Over cash. That's a really good question. We've gotten that quite a bit lately, especially with the under-performance of bonds that we've seen. And what I've told clients is that it's really important that you match up the duration of the bonds.
You're holding with the duration of when you're actually going to need those funds. So let's say that you've got a pot of money that you're not going to need for three years. You're likely going to get a better rate of return and a three-year bond than you would just putting that money in cash.
Likewise, if you needed money, let's say in 17, You're probably going to get a better rate of return and a seven-year bond than you would in a, either cash or even in a three-year bond. Okay. So just being realistic about when you're actually going to need the money. Absolutely. So the, the important thing is if you're owning bonds is to look under the hood and see what is the duration of what you own.
You know, if you're owning a bond ETF or a mutual. What is that real quick? If you're just tuning in, I just want to remind everybody, this is not a show about cars. We've talked about looking under the hood Mustang, Eleanor, we'll try it. So that's what, if you have any bonds in your portfolio? That's the important part is just to make sure that you understand the type of bonds you're owning and really the duration of those bonds.
Okay. So now that we've covered how rising interest rates can affect your bonds and your immediate use things, what about how they affect your portfolio as far as stock. So I wish this was as straightforward as bonds. Uh, unfortunately it's a little bit more complicated than just rates go up. This is what happens to stocks, because there are a number of factors when looking at what drives stock prices.
So, you know, on the business side of things, as you see higher interest rates, well, that means higher cost of borrowing for certain companies. That means that it's going to be a little harder for certain companies to grow because. For them to go out and, you know, take on debt. It's going to cost them more, which is likely to result in lower revenue, lower profitability.
So if you're a stock analyst and a stock investor, you might go, well, their profitability isn't as good as what it used to be. Maybe I don't want to buy that stock. So you might see that in certain sectors of the market. There are certain sectors that actually do well in a rising interest rate environment.
Uh, you know, things like financials, those tend to do a little bit better just because they can pass those higher interest rates on to the consumer by way of what credit card rates, things like higher credit card rates, higher mortgage rates, you know, higher just lending costs in general. And so they're able to make a higher margin on those, uh, on those loans that they're providing.
And at the same time, I think we all know how much we're getting on our savings accounts right now at 0.01 or two, maybe. So it's not that five and a half. You were talking about 15 years ago, not the five and a half percent. So they're not, they're not passing the benefit on just yet, but they're definitely raising rates on their lending.
So that's how, you know, those types of tours. And so, you know, another aspect that is, uh, that is impacted with rising rates is this concept of equity duration. So we talked about bond duration in terms of, you know, how long of a bond you owned you on a 30 year bond. Ten-year five-year, you know, any denomination, most people don't think of stocks in the concept of.
I mean, you think you have a stock you're prepared to sell it or hold it or whatever at any given time. Yup. But what I mean by equity duration is how sensitive is a certain stocks cashflow to the discount rate to interest rates essentially. And so you think about why do we own stocks? Well, we all own stocks.
Have partial ownership and a company's cashflow. So one of the most common methods that a lot of portfolio managers and analysts use is what's known as the discounted cashflow method. And what does that? So that is where an analyst will analyze a company and project out their future cashflow into the future.
And then what they do is they take that cashflow and they discount that back to the present day to figure out what is this company worth today? Now to calculate that present value, you need to have some sort of discount rate or better known as an interest rate. And so, which is why the current interest rate is so important.
Absolutely. And that's why it's V now you're thinking about it, very similar to bonds, where as interest rates go up, the value of that company, the value of that equity goes down. Okay, that makes sense. And that's why, what we're seeing right now is that companies that are longer duration. So you think of growth companies where they don't have a mature cashflow, like value companies, value stocks typically have already established cash flows.
You know, they're less susceptible to the rise in interest rates, but if you're a company that is in growth mode and you're not necessarily turning a profit or delivering any. Dividend or real cashflow to an investor. It's just a, Hey, at some point, we're going to grow to that. We'll now that discounted, present value is going to be lower than what it was even five or six months.
And that's why, why we're seeing a bigger pullback in an industry like the NASDAQ than we are in the Dow, just because you've got mature, more mature cashflows in the Dow, and you've got a lot more growth companies in the NASDAQ. So, you know, that's, that's the relationship that you're seeing with interest rates in stocks fell all their growth stocks.
No, this is not a call to go out and sell all of your growth stocks, but it isn't, it is a time where you really want to analyze the holding. Yeah. Understand what is your interest susceptibility? You know, because the reality is that most investors have been overweight growth since 2009, because with interest rates near zero for 13 years, The rail is that growth companies did do well over that entire timeframe because, you know, for the most part it's, you can discount those numbers back and it's going to lead you to a higher equity value.
But now that we're starting to see that, that trend switch where we're going into this rising rate environment, you know, I think that, uh, that switch from growth to value is changing as well. Okay. So that's kind of how it affects the stock market and. All of your money, essentially, that you have right now.
What about how interest rates affect your, I don't know, your retirement planning. So there's a number of different things that it affects when talking about just the concept of retirement planning. I think the first one that comes to mind is, uh, you know, lump sum pensions. So we've got a lot of clients that have a pension.
I don't know any single person that has our age that has a pension. We do have an idea of a pension would love to have a pension, but we know a lot of clients that were at large organizations that at some point had a pension and there's a decision that needs to be made at some point. You know, if offered that, do you take a lump sum or do you take the monthly annuity where it's often contemplated that as well?
If I won the. 'cause I think that's one of the options to lump sum or taking the annuity. So same type of thing, but Lumion, when looking at a pension, think of a pension as exactly what it is, it's a long-term care. So, if you were to figure out what is that worth today? Well, you have to discount that back to present value, which means you need a discount rate, essentially, an interest rate.
And it's the same thing goes back to the interest rate. All goes back to the other show. As in strips, go up that present value calculation of lump sum will, will likely go. And so same kind of thing is we talked about with bonds and stock. So, you know, I, I know some clients that have left a company that, you know, had a pension and they have this option of, they can let it defer and wait until, you know, there are a certain age and they can make it a.
Taken an annuity payment or, um, taken a lump sum. But if you have the ability to analyze that now, like you've got a pension that's just sitting there. Maybe it's time to really assess whether or not it is best to take the lump sum now, or just take the longterm cashflow. So that is, that is something that will be affected.
So another thing that, you know, rising and straight effects is housing in terms of clients that want to relocate or refi their mortgage, you know, it's going to affect mortgage rates and we're already starting to see. Uh, if you have an old adjustable rate mortgage, well, that's going to start adjusting at a higher rate, so it could impact your cashflow.
Yeah, it could, it could really impact your cashflow. If you know, you've planned for retirement to be a certain amount per month or per year, and now your mortgage is rising because of rates. So the one thing to keep in mind, um, another thing is credit cards. So really any type of consumer debt that.
Especially, uh, just rate mortgages and credit cards because those are variable. So those look at that were so insane. So the credit card. So those are ways that it can affect your cashflow, you know, month to month or year to year. Um, I know that you talked about how it can affect, um, businesses and a little bit when we were talking about stocks and growth versus value, things like that, but how does it affect, how do rising interest rates actually affect.
Businesses and companies and employers and things like that. So because now it does cost more to take on loans. So that's what a company is doing when they go out to the bond market and they issue bonds really they're taking a loan from. So now that that loan costs more, maybe they don't take as much of a loan.
Maybe they don't take one at all because the cost is too high. And so if they don't have that money, maybe they're not hiring. Maybe they have to cut back on their, you know, on their employee right now. And so you, you might see layoffs at some point, you, and, um, this isn't saying that every company is gonna start laying off fuel because higher interest rates are there, but, uh, The cost of business is going up.
And so, because that businesses will likely slow down. So just from an employment standpoint, if you're not building new factories or building new stores, well, you don't need workers to work. Those, you don't need workers to work those into that expansion if you're not expanding. So I think from a business aspect, that's one thing that, you know, for those who aren't retired and are a long ways away from retirement, kind of talked about this in our recession episode last week, right?
Yeah. If you are, you know, if you're in a company that is taking on a lot of debt and maybe that's something you're aware of. Okay. So now that we've talked about how it affects businesses and people spending money, the people who aren't necessarily in retirement, what about the people who are trying to save for it?
Like if you have a 401k or for example, instead of a pension or something, Yeah. So for 401k investors feel like a rising and SREs is going to be a real challenge. And the reason why is that most foreign Ks have very little diversification options in terms of bonds within a 401k. I mean, we typically see one or two bond funds usually.
Usually it's like a stable value fund or an intermediate bond fund, but there are no exposures to high yield or treasury inflation protected securities, or, you know, senior loan notes or emerging market debt or international bonds. Usually it's very limited. And so. You know, the ones I just mentioned, those are a little bit less sensitive to rising rates.
Whereas your traditional intermediate bond fund can be a lot more susceptible than, you know, high yield or any other type of bonds. So trying to figure out how to remain diversified in bonds within a 401k is going to be challenging. And so I think for those that are listening, you really want to understand the type of bonds offered to your.
I would definitely look into the duration of those bonds. And then at the same time, you want to look at possibly some of the target date funds that are offering 401ks, because so those do sometimes have diversification into different types of bonds that aren't offered as a single standalone fund. So.
Hi, rates have to be a good thing, right? Yeah. Go back to that. You know, 15 year ago, client at five and a half percent, at some point it's going to be a great thing, especially on point at some point, especially for retirement investors. I mean, this is what we've, you know, as retirement advisors, this is what we've been hoping for is that you get to a point where you can say, okay, for very little risk, we can, you know, get a CD or a bond that's given you five or 6%.
But we're just, we haven't been in that environment for 13, 14 years, if not longer. So, um, eventually we'll have higher income on cash and fixed income. It's just, it takes some pain to get there. It's definitely painful to get there, especially if you're investing in bonds or long, really long duration after.
So kind of going through the interest, rates, them rising that we're seeing now, it really is just kind of like a growing pain of the market or life. I mean, it affects everything. Yeah. It's a growing pain, just like our daughter sleep regression was another big growing pain. So the key right now is to just analyze what you're holding, go through and make sure you know, what it is.
Uh, what are the sectors? How sensitive are they to interest rates going up? Because the reality is we're not done yet. The feds raised rates one time and you know, the projections on the street are anywhere between four, four times or up to, I've seen up to nine or 10. So, uh, there's a lot of. Interest rate interest rate hikes on the way.
Uh, so just make sure you understand what you buckle up and understand what you own is the, is the key there. So, um, is that what you would say to, to our listeners is the most important things, just know what you own? No. What you own know the sensitivity that each one of those investments has with in straits.
And if you don't even know where to start, because a lot of people don't know where. And I think that's the hard part. You go, okay, well, I've got this 401k and, or, you know, investment that I've put together over the course of. How do we go about analyzing this? Because let's just start, well, let's just face it.
A lot of investors bought investments, especially in their 401ks, based on a three-year performance number or a one-year or a five-year or a 10 year, just a list you're going through and you're looking at, okay, this one's the best. This one's the best. Exactly. So, you know, but the reality is that what got you to this point is probably not going to get you where you were.
And so, you know, analyze what you own. If you don't know where to start, we'd be happy to help you. Uh, there is a link in the show notes below to, to schedule a call with us, happy to talk to you, happy to look over everything for you. Yeah. So just reach out to us and we'll help you analyze what you own and we'll just figure out, okay, why, what purpose does this make in your portfolio?
So I think that's the key and, you know, with everything going. Retirement is supposed to be a good time. You know, this isn't a post to be fun. This isn't a call to just try and stress you out and say, well, write your rise and go out and make all these. It's just one of the things you want to be aware of.
And so, um, with that before we get out of here, what do we want people to do? Tell them again, subscribe. Definitely. Subscribe, subscribe, hit the like button for listening on podcast platforms, five star reviews. We really appreciate it. And with that, remember he retired, not expired. No, you're not. I'm Jonathan Rankin and I'm Melissa Rankin.
Thank you for joining
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