How will the Fed's rate cuts affect your retirement savings strategy?
The Federal Reserve had an inflation problem to tackle in 2022 and 2023, and it raised interest rates numerous times to tame it. Since the start of 2024, inflation has moderated. And in August, annual inflation was measured at 2.5%, per the Consumer Price Index. That's not so far off from the Fed's preferred 2% target.
In light of that, the Fed lowered its benchmark interest rate on September 18 by half a percentage point. And it's a move consumers will likely be celebrating in the coming weeks and months.
Lower interest rates tend to ease pressure on borrowers, because even though the Fed doesn't set mortgage or auto or home equity loan rates, its monetary policies influence what these products cost consumers. With the Fed's benchmark interest rate coming down, borrowing should get less expensive.
You may be wondering if the Fed's interest rate cuts should influence your approach to retirement savings. But there's a pretty clear answer to that question — no.
Why the Fed's cuts shouldn't matter to your retirement portfolio
In light of the Fed's interest rate cuts, savings accounts and CDs might seem less appealing. So you may want to move some of your near-term cash around by, say, transferring extra savings to a brokerage account instead of keeping it in the bank as rates fall.
But the Fed's recent rate cut, and any future rate cuts that come down the pike in the next year, should not influence your retirement savings strategy. Simply put, if you're still many years away from retirement, you should be putting the bulk of your savings into the stock market.
You need stocks to fuel your portfolio's growth. And investing the bulk of your retirement account in CDs is not a good idea even during periods when rates are higher, which has been the case in 2024.
And if you're worried that the Fed's rate cuts will negatively impact stocks, know this. Just as lower interest rates make it easier for consumers to borrow money, so too do they make it easier for companies to borrow money. That allows companies to expand, leading to potentially higher stock prices.
Furthermore, lower interest rates tend to fuel consumer spending. When rates are lower, savings accounts and CDs become less attractive, so consumers are typically less motivated to park their cash and are eager to spend it instead. That could be a good thing for stocks, too.
But regardless of rate cuts or consumer spending patterns over the next year or so, you should recognize that stocks are your best option as a long-term retirement investment. So in the context of your 401(k) or IRA, it almost shouldn't matter what the Fed is doing if you're nowhere close to retirement age.
Keep thinking long-term
Just as a stock market downturn shouldn't rattle you too much as an investor if you're saving for a retirement that's many years away, so too should the Fed's decision not change your approach to building your nest egg. Stocks have long been considered the gold standard in the context of retirement savings. And there's no reason to think anything should change just because the Fed is finally taking action on interest rates.
Of course, you may decide to take advantage of lower interest rates in the coming year by refinancing your mortgage or another loan, thereby freeing up more money to allocate to retirement savings. That's certainly not a bad idea at all. But beyond that, the Fed's actions shouldn't change your approach to saving for the future.
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