What Interest Rate Changes Mean for Your Retirement Savings

Few pieces of economic news get as much attention as a Federal Reserve rate decision. For someone saving for retirement or living on savings, the question is simple: what does it change for me?

The answer depends on what you own. A rate change touches savings accounts, CDs, bonds, annuities, loans and even stocks, but not all in the same direction. This page walks through each one in plain words. It doesn't say where rates are headed, because nobody knows that reliably.

What happens when the Fed changes interest rates?

The Fed changes one short-term rate, and that change spreads to many other rates over time. Some move quickly, like savings account yields. Others, like long-term bond and mortgage rates, move on their own and don't always follow.

The Federal Reserve (the Fed) is the US central bank. Its rate-setting group, the Federal Open Market Committee, holds eight regularly scheduled meetings a year. Its main tool is the federal funds rate, the rate banks charge each other for overnight loans. The Fed explains that changes in this rate "influence other interest rates," which in turn affect what households and businesses pay to borrow.

The Fed also notes that the links from its policy to jobs and prices "are not direct or immediate." For a retiree, that means a rate announcement is the start of a slow chain of changes, not a single event that calls for a quick decision.

How do rate changes affect savings accounts and CDs?

Savings accounts and money market deposit accounts usually follow rates up and down, sometimes with a delay. A CD (certificate of deposit) locks in its rate until it matures, so a change only reaches you when you open a new one.

When the Fed raised rates in 2022, the Consumer Financial Protection Bureau (CFPB) said that families with savings "should expect to earn a higher interest rate." It also noted that large banks are often slower to raise what they pay on deposits. So it can pay to compare what your bank offers with other insured banks.

A CD is a savings account where you leave the money for a set period. The CFPB warns that withdrawing early "means paying a penalty fee to the bank." That trade-off works both ways. If rates rise after you open a long-term CD, you are locked in at the lower rate. If rates fall, your CD keeps paying the higher rate until it matures.

Bank deposits, including savings accounts, money market deposit accounts and CDs, are insured by the FDIC up to at least $250,000 per depositor, per ownership category, at each insured bank. Stocks, bonds, mutual funds and annuities are not FDIC-insured, even when you buy them at a bank.

Why do bond prices fall when interest rates rise?

Because a bond's interest is usually fixed, and when new bonds start paying more, older bonds paying less become less attractive. To sell an older bond, you have to accept a lower price. When rates fall, the opposite happens and existing bonds become worth more.

Think of it as a seesaw: rates on one end, the prices of existing bonds on the other. FINRA, the brokerage industry regulator, gives an example. Say you own a 10-year, $1,000 bond paying 6% a year. Rates rise and a similar new bond now pays 7%. Nobody will pay full price for your 6% bond when they can get 7% elsewhere, so if you want to sell, you would have to price it below $1,000.

How much a bond's price moves depends on its duration, a number that measures how sensitive it is to rate changes. FINRA's rule of thumb: for every 1 percentage point change in rates, a bond's price moves about its duration number, in percent, in the opposite direction. A bond with a duration of 10 would fall about 10% if rates rose 1 point. Longer-term bonds usually have higher durations, so they swing more.

This seesaw is real, not just theory. In Aswath Damodaran's historical return data from NYU Stern, the 10-year US Treasury bond lost about 17.8% in calendar year 2022, a year when rates rose quickly. Past performance does not guarantee future results.

Do I lose money on bonds if rates go up?

Only on paper, if you hold an individual bond to maturity and the issuer pays as promised. You keep getting the same interest, and you get your principal back when the bond matures. A bond fund works differently.

FINRA puts it plainly: "The market price of a bond doesn't matter much if you aren't looking to sell." The price drop matters if you need to sell before maturity, because that is when the lower price becomes a real loss.

A bond fund is different because it holds many bonds and keeps buying and selling them, so it has no single maturity date. Its share price rises and falls with rates, and you don't get a set amount back on a set day. Many 401(k) plans offer bond funds rather than individual bonds, so it helps to know which one you have.

This is one reason people near retirement often hold a mix of shorter and longer bonds, or a "ladder" of bonds and CDs that mature in different years. Money needed soon sits in shorter terms, which swing less.

What happens to my income when interest rates fall?

Falling rates are good for the price of bonds you already own, but they can shrink future income. When a CD or bond matures, or is paid off early, you may only be able to reinvest the money at a lower rate. This is called reinvestment risk.

FINRA describes it as the risk that no available investment will provide a return similar to the bond you had. It often shows up with callable bonds and CDs, which let the issuer pay you back early. FINRA notes that issuers tend to call bonds "when interest rates are falling." The SEC says the same about callable CDs: "If interest rates fall, the issuing bank might call the CD," and only the bank, not you, has that right.

For a retiree who lives on interest, this matters. A drop in rates can mean a smaller paycheck from savings a few years later. People in this situation often consider spreading maturities across several years, so not all of their money has to be reinvested at the same time, and checking whether a bond or CD is callable before buying it.

How do interest rates affect annuity payouts?

For a new immediate annuity, the rate level when you buy matters a lot. Once you buy, the payment is usually set and doesn't change with later rate moves.

An immediate annuity is a contract with an insurance company: you pay a lump sum, and it pays you income, often for life. FINRA describes the payment as "a predetermined fixed amount of money, usually on a monthly basis (similar to a pension)." AARP explains that the amount you get "depends primarily on your age and current interest rates." So two people of the same age who buy in different years can get quite different payments.

Fixed deferred annuities, which grow at a set rate before payouts begin, work more like a CD. FINRA notes that the rate is often fixed for a number of years "and then changes periodically based on current rates."

Two cautions apply. Most immediate annuity payments don't rise with inflation unless you pay for that feature, and the decision is usually permanent. Deferred annuities often charge a surrender fee if you take money out early, and every annuity has costs that are worth getting in writing. Our guide to investments that pay monthly income compares annuities with bonds, CDs and dividend funds.

How do interest rates affect mortgages and home equity?

It depends on whether your loan has a fixed or a variable rate. A fixed-rate mortgage doesn't change. Variable-rate loans, including most home equity lines of credit, can cost more when rates rise.

The CFPB explains that on a fixed-rate mortgage, "the interest rate is set when you take out the loan and will not change." On an adjustable-rate mortgage, the rate "may go up or down." A home equity line of credit, or HELOC, lets you borrow against your home as needed, and the CFPB says "HELOCs usually have adjustable interest rates."

For retirees, a few points follow:

• If you have a fixed-rate mortgage, a Fed rate change doesn't change your payment.
• If you carry a HELOC or other variable-rate balance, rising rates raise the cost. Some people pay these down before retiring.
• If you plan to downsize or move, mortgage rates affect what buyers can afford and what your next loan would cost.

How do interest rates affect stocks?

Indirectly, and not in a predictable way. Higher rates raise borrowing costs for companies and give investors a competing option in savings and bonds. Lower rates do the opposite. But stocks move for many reasons at once, and rate changes are only one of them.

The Fed's own explanation is that lower rates make it cheaper to borrow, which can encourage spending and hiring. That can help company profits over time. But the market often reacts to what investors expect the Fed to do, before it acts, so the move on the day of an announcement can be small or even go the "wrong" way.

For a retiree, the useful lesson is that a rate change isn't a reason to sell stocks or buy more. The stock part of a plan is for long-term growth, and it is sized so you won't need to sell it in a bad year.

How do interest rates affect gold?

There is no reliable rule. Gold pays no interest, so when savings and bonds pay more, holding gold means giving up that interest. But gold's price moves for many reasons, and it has risen and fallen in periods of both high and low rates.

Gold also can't do several things a retiree may need. It produces no income, it costs money to store and insure in an IRA, its price can swing sharply, and it has gone through long flat stretches. Our comparison of gold, stocks and bonds shows how each did in years like 2008 and 2022.

What can I do when interest rates change?

Usually very little right away, and that is fine. A plan built for rates going either way already has a mix that does some good in each case.

People in this situation often consider:

1. Comparing savings and CD rates across FDIC-insured banks when rates rise, since some banks are slow to pass increases on.
2. Spreading CD and bond maturities over several years, so not everything renews at the same rate.
3. Checking whether bonds or CDs are callable before buying.
4. Knowing whether you hold individual bonds or bond funds, since they behave differently when rates move.
5. Looking at variable-rate debt, such as a HELOC, before retiring.

Interest rates are one of several forces on a retirement plan. Our Market Insights overview explains how they fit with inflation, recessions and market drops, and our guide on protecting savings from inflation covers Treasury inflation-protected bonds. For choices about your own accounts, talk to a fee-only fiduciary or a tax professional.