How to Make Changing Interest Rates Work for Your Retirement

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published 27 April 2025

We’re hearing a lot about the status of interest rates and where they’re headed these days. It’s vital for you to know how they can affect retirement planning and what you can do to protect more of your money.

The contrast in interest rates between now and 15 years ago is stunning. In 2008, the federal funds rate dropped to virtually zero and remained there for approximately seven years. Your savings account likely quit paying much of anything in interest.

CDs were paying practically nothing. It was really hard for savers who relied on the interest from those accounts to cover their expenses.

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For the spenders, of course, it was great; borrowers were getting 0% rates on car loans and 0% promotional rates on credit cards, as well as mortgages at 2% or 3%. Those factors were why the economy did really well for a long time.

Going back to the 1980s, passbook savings accounts, which are no longer common, were paying 12%. That’s ludicrous to think of now. A gentleman I know tells a story about when he had an FHA loan on his first home. It was 18%, and he thought he got a good deal. If a bank were to offer a mortgage at 18% today, you’d say, “You’re crazy.”

Today is a different story. We’re going back to people thinking interest rates are incredibly high. Historically, though, they’re still really low — just not as low as they were 10 to 15 years ago.

To put it in perspective, remember that interest rates are cyclical. Most importantly, ensure that you have sufficient flexibility in your retirement plan so that if interest rates rise or fall, you can adjust. It’s no longer enough to plan to live off the interest on our savings or CDs.

Interest rates affect different asset classes in different ways, which in turn impact decisions on asset allocation strategies. You’ll need to consider the full range of options — stocks, bonds, real estate, tax strategies and more — when making adjustments to your retirement plan.

Devising an inflation-adjusted plan

Interest rates and inflation are correlated, meaning they tend to move in tandem. Your retirement plan should include elements that are inflation-adjusted.

Interest rates play a significant role in retirement planning, affecting decisions like buying a car, taking out a mortgage for a new home or planning a vacation. Your dollars need to be liquid and flexible enough to adjust accordingly.

Don't lock yourself in for an extended period. If you think interest rates are going to rise or fall, and you're wrong, you just rolled the dice and locked yourself into something that could be detrimental to your retirement.

Example: Let’s say that years ago, when rates were super low, you bought a 1% CD and locked it in for five years. When rates rose past 5%, you would have been on the sidelines, missing out on the growth.

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Or perhaps you locked yourself into a long-term 3% rate on an investment before inflation took rates to 8%. With your money earning 3%, you’re missing out on 5 percentage points in returns that could be used to fund your later years.

Even if the dollar figure on your statement is not decreasing, inflation means the buying power of those dollars is dropping in value. If the growth of your money is not at least keeping pace with the inflation rate, you're losing purchasing power every year. Ideally, your plan is set up to outpace inflation.

Consider the bucketing strategy

If you're trying to achieve sufficient growth in your retirement plan to outpace inflation, yet you're not far from retirement and don’t want to be overly exposed to the stock market, the bucketing strategy can make sense.

There are three buckets:

First, you've got your “right now money.” How much money do you need for the next one to three years? That money should be invested conservatively.
Next, how much will you need in three to seven years? The aim with the second bucket of money should be moderate growth to keep it ahead of inflation.
The third bucket is for seven years out and beyond. This money can be invested aggressively.

As I spend from my first bucket, my goal is to use it up by the end of the third year (and then replenish it from the second bucket). My three-to-five and three-to-seven-year buckets are going to grow. They’re (hopefully) designed to outpace inflation because I was able to take on a little more measured risk.

Challenge the norm of paying off debt

We're all taught to pay off debt, but it’s not always the best financial choice. Sure, it’s great to retire with all debts paid, but if you have a mortgage with a 2%-3% rate, it might make sense for you to keep that mortgage.

For example, let's say your long-term investments are gaining 7% or higher annually, and your mortgage costs 3%. You're getting wealthier every year by investing the money you could have used to pay off the loan.

This can go the other way, however. If your mortgage is costing you 7% but your investments are returning only 3%, you may want to start paying off that mortgage as quickly as possible.

Rising interest rates pose challenges but also present opportunities. Having a strategy and working with a retirement planner to adapt your strategy is key.

Dan Dunkin contributed to this article.

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Phil Cooper is the founder, CEO and Financial Adviser of 210 Financial. He has spent over 25 years in multiple areas of the finance industry, including 19 as an Investment Adviser Representative, and 16 years running his own practice. Cooper passed both the Series 63 and 65 securities exams and holds a bachelor’s degree in biblical studies as well as an associate degree in electronic engineering.