Why rate cuts are happening now
On Sept. 18, 2024, the Federal Reserve lowered its benchmark interest rate by half of one percentage point. And that rate cut is likely to be the first of several.
The Fed raised interest rates numerous times in 2022 and 2023 to bring high inflation back to a more moderate level. And its efforts have paid off.
In September, the Consumer Price Index, which tracks changes in the cost of consumer goods and services, measured annual inflation at 24%. That’s fairly close to the Fed’s 2% annual inflation target over, which helps explain why the agency opted for a relatively aggressive rate cut in September.
Meanwhile, as long as inflation continues to cool, the Fed will no doubt seek to bring its benchmark interest rate down to pre-hike levels. Future cuts should make borrowing money less expensive, but they’re also apt to lead to lower interest rates for products like savings accounts and CDs. That’s not the best news for someone close to retirement looking for safer options for their money.
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Read MoreSmart places to put your money as retirement nears
Even though stocks tend to be volatile, they’re still an appropriate investment for at least some of your savings during retirement. The more your portfolio grows during your senior years, the more money you can afford to withdraw on a yearly basis to fund your lifestyle. So depending on your personal risk tolerance, you may want to keep a significant portion of your long-term savings in stocks when you’re on the cusp of retirement.
As for the remainder of your savings, it should be a mix of lower-risk investments and cash. Although interest rates are falling, savings account and CD rates are still attractive.
You don’t want to tie up all of your cash in CDs, though, because there’s typically a penalty for early withdrawals. Keep at least one year’s worth of cash in a regular savings account, even though there’s a good chance its interest rate will fall steadily over the next year or so.
Meanwhile, because CD rates are still pretty strong, it’s a good time to set up a CD ladder. Consider terms that range from 12 to 60 months, with a portion of your money maturing every year for added flexibility.
Short-term bonds or bond funds are another option you can look at. You shouldn’t expect the same returns as you’d get from stocks, but bonds are less volatile.
Also look at municipal bonds for steady income; they’re a great investment option without the tax headache. The interest you collect from municipal bonds is always federally tax-exempt. And if you buy bonds issued by your state of residence, you typically won’t pay state or local taxes, either.
Bonds tend to have an inverse relationship to interest rates. So when interest rates are expected to decrease, which is the case today, bonds can be a good bet because their value is likely to go up.
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