It’s no surprise that life is more expensive today than it used to be. Consider the following timeline by the Federal Reserve in setting the federal funds rate that influences interest rates.

• 2009-2015: Rates were near 0% due to the Great Recession
• 2015-2018: Rates increased to 2.50%
• 2019: Rates cut to 1.50%
• 2020: Rates cut to 0% with Covid to save the economy (and the world)
• 2022: Rates increased to 4.50%, the steepest hike in US history
• 2026: Rate is currently 3.75% with another Fed meeting on the horizon

Interest rates directly influence where investors spend, borrow, and save for their retirement. Last year, it seemed like we may be heading towards lower interest rates. Now, due to a resilient economy and strong consumer spending, prices continue to rise. 

To complicate matters, consider the $8 trillion dollars in current money market deposits. I wrote Who’s holding all that cash? last September to spotlight where $7 trillion at the time was distributed. As cash keeps accumulating, it becomes another data point to consider in figuring out interest rates.

So What?

All investors are paying more for vacations, big-ticket purchases, home renovations, and dinner out with the family. I think these elevated costs will stick around longer than anyone can imagine. Why? It makes sense to me that if the rubber band was stretched in one direction (uber low rates for an extended period) it’s likely to snap back in the other direction (higher rates for a while longer). How long, that’s anyone’s guess, but that completely misses the point.    

How do you make investment decisions in this environment?

This is the point that each investor needs to answer for themselves and family.  It’s also the purpose behind creating and updating your financial plan as investment decisions stretch beyond today. Most investors I initially speak with typically have defaulted to target date funds in their retirement and education accounts. I get it, it seems logical, the path of least resistance so your brain can go about making other important decisions. But there are spending limitations with this approach that we’ve already covered together.

In the current environment, fixed income investing is more sensitive to interest rate changes. Owning companies for the long run has its own challenges too. Diversification in all companies and then sitting still when prices are up and down is not natural. All investors should know what they own in their portfolios and why. A financial plan helps clarify what future spending may look like as inflation increases costs. This knowledge allows investors to be better informed in selecting investments today and tomorrow. 

Cashflows, it’s all about cashflows. Rising costs are easier to address through your working years as income arrives every two weeks. It becomes more of a test once you’ve stopped working and have accumulated a reservoir of investments. There’s an art to transforming these assets into spendable income while managing liquidity. Planning makes this possible.

Real life retirement readiness

Consider a fictitious couple, John & Mary. Both are working, in their 50s, and have $1.5 million each in their retirement accounts. In ten years, they want to “retire” and control more of their time. Starting with the end in mind and working backwards, a financial plan should present questions today that may be revisited periodically before retirement begins.

• How does housing debt influence John & Mary’s plan to stop working? Will they accelerate mortgage payments in the next ten years, move, or perhaps keep working at a reduced schedule?
• How do ad hoc financial gifts to their two young adult children influence their retirement timeline?
• What’s the best health insurance choice available before John & Mary are eligible for Medicare?
• How should the combined $3 million in retirement values be invested to and through retirement for sustainable spending?
• What’s the ideal cash reserve that creates room for error and opportunities?
• Spending on travel, hobbies, and fun must be prioritized alongside recurring expenses. What’s realistic and sustainable?

This is planning

A financial plan and planner are there to answer these questions with you proactively before it’s needed. Planning involves so much more than where to invest today. Supporting dialogue creates space for your retirement to come into focus. It’s your journey, start a conversation to get closer to what you want.