Empower Retirement President Ed Murphy's Fed rate hike post

Use the Fed rate hike to lift your retirement mindset

Edmund F. Murphy III

People who watch the stock market closely weren’t surprised this week when, with mixed reaction, Wall Street greeted the Federal Reserve’s decision to bump up interest rates.

The Fed’s move was a long time coming, and most competent CFOs had a rate hike baked into their company’s near-term financial plan. Wall Street was expecting this. In fact, I’d venture to guess that perhaps inaction by the Fed might have been met with a more pronounced market move, given some recent highlights underscoring the strength of the U.S. economy.

A lot of ink has been spilled over the last year trying to predict how the Fed would act on rates and the impact its decision might have on markets. After all, it’s been almost a decade since the last rate hike, and with new market players and new trends in the economy, the impact of elevated rates is a topic of great importance.

It’s a natural phenomenon for any investor to speculate how news events, big or small, might impact the performance of a particular portfolio. There are plenty of people who have a large portion of their hard-earned life savings at risk in the equity, debt and real estate markets — all of which can be influenced by a litany of factors, including interest rates.

However, some people with retirement plans have taken action to help them prepare for the impact of rising and falling markets. Here are some of their strategies:

A monthly mindset

When thinking about retirement savings, it’s critical for investors not to focus on accumulated assets. Instead, their focus should be on the monthly income that retirement savings can generate in retirement. Despite what many think, the true purpose of a retirement plan is to replace income in retirement — it’s not to buy a boat, travel to Europe or to be used as spending money. A retirement plan is designed to provide income for when one is no longer working.

A combination of a person’s accumulated assets, Social Security and payments from defined benefit plans can be combined into a single number that represents one’s likely monthly income in retirement.

As volatile markets rise and fall, an investor’s future monthly income may make slight adjustments, thereby easing the fears that otherwise could result from big market swings. In other words, the impact of market gyrations on one’s monthly retirement income figure may be less pronounced and less likely to cause emotional buying and selling.

Consider a managed account

Earlier this fall, Empower Retirement, in conjunction with Advised Assets Group, LLC (AAG), a federally registered investment adviser1, produced an important piece of original research that considered the impact of market volatility on portfolio returns. We ultimately found that individuals who participated in a managed account may have had greater annual returns year-over-year than those who were self-managing their portfolio. (Check out our press release to learn more.) Proper asset allocation is an essential component to maximizing retirement savings. Through a managed account, participants receive the help of an investment professional to help analyze their portfolio based on goals and risk tolerance and hopefully take the emotion out of investing. Individuals interested in learning more about a managed account should ask their employer if such an option is available.

Speak to an advisor

Hopefully everyone has an advisor with whom they’ve developed a retirement plan that’s aligned with their goals. Research from the Lifetime Income Score V2 shows that the value of advice is significant. If someone has concerns, now is a good time to talk with an advisor. It would be valuable to see what he or she is thinking about the current market environment, ask questions and discuss any concerns.

With a fresh mindset and with help, people can build confidence in their retirement plan and leave the fears about market swings to the professionals.

1 Advised Assets Group, LLC (AAG) is a wholly owned subsidiary of Great-West Life & Annuity Insurance Company. More information can be found at www.adviserinfo.sec.gov.
2 Empower Retirement, Lifetime Income Score V: Optimism and opportunity, March 2015.

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