The Federal Reserve cut its target federal funds rate to a range of 4.75% to 5% on 18th September 2024, marking a reduction of 0.5%. As Kavan Choksi underlines, the federal funds rate reflects the interest rate banks charge other banks to borrow funds. Lower interest rates allow consumer banks to charge lower interest on typical consumer loans, like credit cards and mortgages. The theory behind this is that consumers shall pay less to borrow funds, which can stimulate their spending and ultimately the economy.
Kavan Choksi marks what the fed rate cut means for retirees
The Federal Reserve typically lowers interest rates in order to stimulate and improve the economy of the country. Hence, anyone having a direct stake in the economy is likely to enjoy a positive gain from the interest rate reduction.
Here are a few situations when lower interest rates can improve the finances of the retirees:
- Bonds and stock investments generally appreciate when interest rates go down. Hence, the cut is already likely to be priced into the current market value of the investments of the retirees.
- If the retirees have a variable interest rate mortgage, then lower interest rates shall reduce their monthly mortgage payment. On the other hand, in case they have a first mortgage with a fixed interest rate, retirees might be able to refinance their loan at a lower interest rate. This would ultimately help lower the monthly mortgage payment.
- If a retiree has plans to take out a reverse mortgage on their current home, a lower rate of interest would reduce their overall borrowing costs. The accumulated loan balance shall also grow at a slower pace. This shall provide retirees with improved net home equity as they eventually sell off their house and pay off the mortgage.
- In case retirees have high credit card debt or some other form of consumer debt, lower interest rates can help reduce the overall amount of interest to be paid. As a result, there would be more money in the pockets of the retirees to spend.
- All United States citizens, including retirees, have a stake in the national debt. Interest rates on the federal debt are among the fastest growing segments in the annual budget of the federal government. A lower rate of interest can help slow the growth of interest people have to pay on the national debt.
There are a number of factors that can impact the decision of retirees to pay off their mortgage. As Kavan Choksi says, one of these factors is whether the mortgage interest rate shall exceed the rate retirees earn on bonds, CDs, and money market funds. Low interest rates on such investments can sway the decision in favour of paying off the mortgage.
For retirees, interest rate changes can also be a good time to diversify the sources of retirement income. Most retirees are likely to have major sources of retirement income that are not influenced by interest rates. Hence, it would be smart to optimize the Social Security benefits and other sources of guaranteed retirement income, like pensions and annuities, in the face of interest rate fluctuations.
