I'm a Financial Adviser: Three Things You Will Wish You Did Before the Fed Cuts Interest Rates

Federal Reserve Chairman Jerome Powell has been under significant pressure from the White House to cut interest rates.

Pretty much every modern president would prefer to serve in a low-rate environment, but none has been as vocal about that desire as President Donald Trump.

Weaker economic data that has recently come to light via a revision and a messenger shot (metaphorically, of course), mean that the president might get his wish in September.

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Kiplinger's Adviser Intel, formerly known as Building Wealth, is a curated network of trusted financial professionals who share expert insights on wealth building and preservation. Contributors, including fiduciary financial planners, wealth managers, CEOs and attorneys, provide actionable advice about retirement planning, estate planning, tax strategies and more. Experts are invited to contribute and do not pay to be included, so you can trust their advice is honest and valuable.

Our retired clients have largely benefited from higher rates, as they have mortgages that were either refinanced around 3% or paid off. They typically don't carry consumer debt and often have the ability to pay for a car in cash when it makes sense.

On the flip side, these retirees have benefited from rates hovering between 4% and 5% on cash-equivalent investments, bonds are actually paying a coupon, and if they want guaranteed income, annuities have come back into favor.

If the Fed announces any significant cuts, mortgage rates are likely to come down. Millennials and Gen Z will breathe a sigh of relief, but Boomers will wish they'd taken advantage of what was available.

Here are three ways to avoid that regret.

1. Lock in cash rates beyond one year of expenses

The money market instruments we use with clients have yields that typically adjust every seven days. When/if the Fed cuts rates, these are one of the first instruments to come down with the federal funds rate.*

If you're very conservative or are using some sort of bucketing strategy where you have more than one year's worth of expenses, you might want to lock in rates for any amount greater than your first year of expenses. Certificates of deposit (CDs) from one to five years are very competitive. Treasury securities over the same terms are similar.

Multiyear guaranteed annuities (MYGAs) are similar in structure to CDs but are offered by insurance companies. They'll allow you to guarantee a competitive rate and defer income taxes until the end of their term.**

If I'd told you a few years ago that you could get about 5% in something guaranteed, I'd have had to tie you down to keep you from putting all your money there. I'm still in the boat of not overallocating to cash, but maximizing the yield on what you have in cash.

2. Look at guaranteed income

MYGAs are a type of fixed income designed for accumulation. MYGAs' cousins are fixed annuities structured for income. Fixed annuity guarantees in both forms are more attractive when interest rates are high.

Deferred income annuities (DIAs), single-premium immediate annuities (SPIAs) and indexed annuities with income riders all look a lot better than they did from 2010 to 2022.

These guarantees are a bit opaque in that you don't know exactly when they'll drop if the Fed cuts rates. But if you're thinking about retirement income and would like to guarantee some portion of it in exchange for liquidity and some upside exposure, it's worth looking into.

We lean on our planning software to compare your current situation with what it would look like with some amount of guaranteed income. Sometimes, it helps. Other times, it doesn't. You can access a free version of what we use here.

3. Re-evaluate your asset allocation

Financial companies benefit from a rising-rate environment. Three years ago, they would charge you 3% for a 30-year mortgage. Today, it's about 7%.

Are they paying you the full 4% delta in your checking account? They keep that spread, and spreads often increase as rates do.

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Real estate investment trusts (REITs) benefit from falling rates because they can buy more with the same interest rate. The point is that different asset classes and sectors do well in different environments.***

If you are a DIY investor, it's probably going to take too much time and effort to try to increase or decrease exposure based on the interest-rate environment.

However, if you're working with a financial adviser, they should be paying attention to where we are and where we might be going.

A few years ago, the acronym TINA was popular, signifying the belief that There Is No Alternative to investing in stocks.

Stocks probably should still make up a significant portion of your portfolio, but for the other parts, there are many alternatives.

* Investment in a money market fund is neither insured nor guaranteed by the FDIC or any other government agency. Although money market funds seek to preserve the value of your investment at $1 per share, it is possible to lose money by investing in these funds.

** Annuities have fees, risks, limitations and restrictions. Withdrawals can be subject to income taxes and, if made before age 59½, to a 10% IRS penalty; surrender charges can also apply. All guarantees and benefits of the annuity are subject to the financial strength and claims-paying ability of the issuing insurance company.

*** Investments in Real Estate Investment Trusts (REITs) involve risks, including the potential loss of principal, illiquidity, and fluctuations in market value. Investors should carefully review all offering documents, risk factors, and tax considerations before making any investment decision. REITs may not be suitable for all investors.

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