Rethinking Retirement Investing Ahead of Fed Rate Cut? What You Need To Know

Over the past two years, investors have enjoyed both strong stock-market returns and solid yields on bonds and cash. That’s been a boon for people preparing for retirement.

But with the Federal Reserve looking set to soon end its interest-rate increase campaign — perhaps with a rate cut at its meeting later this month — investors should be thinking about how to ready their portfolios for a lower-rate environment. Here are some suggestions from financial professionals.

Reevaluate The Fixed-Income Portion Of Your Portfolio

If the Fed reduces its influential federal funds rate in September, interest rates and yields on cash and bonds will follow. That’s why some experts recommend taking another look at your investment portfolio.

As rates rise, bond prices fall. When rates were rising, Monica Dwyer, a senior vice president and wealth advisor at Harvest Financial Advisors, had her clients invest in individual bonds. Now that rates are expected to decline and bond prices will likely rise, she’ll may advise those clients to sell the bonds before they reach maturity.

For people who have bonds maturing in the near future, she recommends taking advantage of higher-yields on shorter-term debt: The yield on a 1-month Treasury Bill was recently 5.38%, for example, compared to 3.84% for a 10-year Treasury note.

“We ... have bonds that are maturing, and as they mature, we’re putting them into shorter-term investments,” Dwyer said.

Dwyer is also a fan of core bond funds for people who are retired or close to retirement. Core bond funds are primarily invested in U.S. fixed-income such as government and corporate debt, according to Morningstar.

Thomas Cook, a CFP, and founder of Retire To Tellico, thinks that now could be a good time for bond ladders, which he prefers over bond funds. With a bond ladder, you invest in bonds with staggering maturities, and as they mature, you reinvest those funds in new bonds.

“The biggest benefit of building a bond ladder is the psychological benefit,” said Cook. “In 2022, interest rates went up, and on paper, if you had to sell your bond, you’d be selling them for a lower price. The bond ladder has already put you in a mental framework that if I just wait, I know exactly what I'm going to get.”

If You Can’t Rely On Cash or Fixed-Income Anymore, Think Equities

For people who worry about yields on fixed-income and cash-equivalents falling, experts believe dividend stocks are a decent alternative that offer regular payments instead of interest, albeit with more risk.

“This might be a good time to diversify money in the market, so we look at dividend paying stocks that are a little bit more secure,” Michelle Crumm, CFP and President of Belle Eve Financial, said.

Crumm advises against investing in individual dividend stocks and recommends investing in low-cost index funds instead.

And while investors have been stashing cash in money market funds and high-yield savings accounts, it’s important to make sure you’re not overallocated in those, according to experts.

David Flores Wilson, a Managing Partner at Sincerus Advisory, notes that some of his clients, who still have decades of retirement ahead of them, are sitting on too much cash, especially because lower interest rates tend to benefit equities.

“We sort of let them know that they'll probably feel some FOMO in the future,” Wilson said.