Tags: Benz | interest | rates | retirees

Morningstar's Benz: Rising Rates Will Provide Benefits for Retirees

By    |   Wednesday, 14 January 2015 02:20 PM

Economists expect the Federal Reserve to begin raising interest rates this year, and if the Fed moves gradually, as most expect, retirees should see several benefits, says Christine Benz, director of personal finance at Morningstar.

Any kind of rate increase will boost short-term yields on savings instruments, such as money market funds and certificate of deposits.

"That's one positive associated with rising rates: yields, in fact, do begin to rise," Benz said on Morningstar.com. A majority of posters in a discussion on the website said they expect more good to come out of rising rates than bad, she related.

"They are very much looking forward to being able to earn a higher safe return on their money. That's something that investors have really been starved for over the past several years."

Meanwhile, a gradual rise in rates could end with minimal damage to the bond and stock markets, Benz said.

"When you examine previous periods in which interest rates have risen, . . . stocks tend to behave reasonably well during those periods," she said. "The key reason is that the stock market is responding mainly to the economic growth that is often precipitating those interest-rate increases."

Annuities would also benefit from rising rates, she explained. "Given how low current yields are, insurers have had to price annuities relatively unattractively. So, payouts for new buyers have not been particularly high. When we do see higher yields, I think that that environment could improve for potential annuity buyers."

Rising rates would also be a tailwind for long-term care insurance buyers.

David Blitzer, chairman of the Index Committee for S&P Dow Jones Indices, agrees that Fed rate hikes likely won't wreak havoc in financial markets.

"A glance at the last two times the Fed shifted from easing to raising rates suggests that these fears [of market turmoil] are misplaced," he wrote on the firm's website.

"The last two Fed tightening moves began in February, 1994 and in June 2004. Both were taken in stride in the economy, the stock market and the foreign exchange markets."

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Economists expect the Federal Reserve to begin raising interest rates this year, and if the Fed moves gradually, as most expect, retirees should see several benefits, says Christine Benz, director of personal finance at Morningstar.
Benz, interest, rates, retirees
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2015-20-14
Wednesday, 14 January 2015 02:20 PM
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