Retirement Planning in a Time of Inflation and High Interest Rates

Today’s challenges make retirement planning even more complicated than usual, but it’s not all doom and gloom.

An older man sits in front of paperwork on his table and stares out the window, looking concerned.
(Image credit: Getty Images)

Retirement planning can be a complex puzzle to solve, with multiple pieces that need to align for a comfortable retirement.

In recent times, two significant factors have emerged to challenge this balance: rising interest rates and inflation. In this article, we'll discuss the impact of these economic realities on retirement planning for individuals and the strategies we recommend at Retirement Planners of America.

The debt-free retirement goal

At Retirement Planners of America, we tell our clients, “When our client retires, so should their debt be retired.” We work hard with our clients in pursuit of getting them there by creating a Retirement Cashflow Plan (RCFP), which is a living document that we review twice a year to help reach that goal. If that can be achieved, to a great degree, you’ve mitigated your exposure to interest rates.

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Essentially, the goal is to achieve a debt-free status before retirement, thereby minimizing the influence of interest rates on loans, borrowing and debt management. Our strategy is rooted in prevention, as we believe that shielding our clients from the effects of interest rate fluctuations is far more effective than reacting to them once they occur.

Understanding the interest rate paradox

One misconception is that rising interest rates could spell doom for the stock market. However, history shows that this belief is not entirely accurate. In fact, many bull markets have occurred alongside rising interest rates.

The reason behind this paradox is that when the economy is thriving, profits tend to soar, leading to stock market gains. To prevent the economy from overheating, the Federal Reserve may raise interest rates, but this period of rising interest rates often coincides with robust profits.

Therefore, the stock market can be a more favorable investment than bonds during these times.

The impact of rising rates on retirees

For individuals on a fixed income, higher interest rates could be a blessing. It can increase income generated from safer investment options. Retirees often rely on fixed sources of income, such as pensions, Social Security and savings in fixed-income investments.

When interest rates rise, the interest or dividend payments from these investments also increase. This results in retirees earning more money.

However, retirees should also be mindful of potential downsides, such as the impact of rising interest rates on the value of their existing bond holdings.

The bond market conundrum

The current economic landscape has led us to make a significant departure from traditional retirement portfolio allocations of stocks and bonds. We exited the bond market in April 2022, sparing our clients from the substantial losses experienced by some investors.

The recent performance of the bond market, which Bloomberg labeled as the worst since 1787, highlights the speed and magnitude of the Federal Reserve's interest rate hikes. This bond market volatility has weighed heavily on some 60/40 portfolios, with some down over 20%.

Why a human overlay matters

The old approach of creating a 60/40 portfolio and leaving it untouched, apart from rebalancing and withdrawal of 4% in retirement, is no longer viable in our view. To navigate the complexities of today's financial markets, we believe it's essential to have a human overlay to help make informed decisions about portfolio components.

We emphasize the importance of having a sell strategy in place to address the stock side of the equation, particularly during severe bear markets, as was the case in 2008.

The role of human oversight

Having an experienced financial adviser who can help make timely adjustments to your portfolio may be helpful during times of market turbulence. While automated investment platforms can provide some basic guidance, they may not have the nuanced understanding and ability to respond to market dynamics in real time, as an experienced professional human adviser may be able to.

The Investment Committee at RPOA uses our Invest and Protect Strategy, as well as our extensive knowledge of market trends, to help make informed decisions about our clients’ portfolios.

Looking to the future

While the future is uncertain, we think there is potential for bonds to regain lost ground if the Federal Reserve decides to pause or lower interest rates. At this time, we believe there is a 50/50 chance the Federal Reserve will raise interest rates in December. If they decide to pause, that could bode well for bonds in the long term in our view.

In today's ever-changing financial landscape, retirement planning can require a dynamic approach. Understanding the relationship between interest rates, inflation and investment options is important. However, we believe the fundamental principle remains: Adaptability is key in retirement planning, especially in these inflationary times.

All expressions of opinion reflect the judgment of the author, Ken Moraif, as of the date of publication and are subject to change. Ken Moraif is a controlling owner and investment adviser representative of MMWKM Advisors, LLC, (d/b/a Retirement Planners of America, “RPOA”), which is an SEC-registered investment adviser. Registration as an investment adviser is not an endorsement by securities regulators and does not imply that ROPA has attained a certain level of skill, training, or ability. Ken Moraif has worked in the financial services industry since 1988. He has been a CERTIFIED FINANCIAL PLANNER™ professional since 1998. Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

Information presented is intended for educational purposes only. Readers should not rely on the content as the sole basis for any retirement planning decisions. A professional adviser should be consulted and/or independent due diligence should be conducted before implementing any of the options directly or indirectly referenced. Any hyperlinks included this article are provided as a convenience for educational and informational purposes only. RPOA does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether hyperlinked within the article or otherwise incorporated herein, and takes no responsibility for the same.

This article should not be construed as a solicitation to effect, or attempt to effect transactions in securities, or the rendering of personalized investment advice. RPOA makes no warranty, express or implied, for any decision taken by any party in reliance upon the information discussed.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Ken Moraif, MBA, CFP®, CRPC®
CEO and Senior Adviser, Retirement Planners of America

Ken Moraif is the CEO and founder of Retirement Planners of America (RPOA), a Dallas-based wealth management and investment firm with over $3.58 billion in assets under management and serving 6,635 households in 48 states (as of Dec. 31, 2023).