Nearing Retirement? Here's What the Fed Rate Cut Means for You

The dust is starting to settle after the Fed finally bit the bullet and cut the federal funds rate for the first time in over four years. Stock indexes such as the S&P 500 rallied to record highs in the days following the Sept. 18 decision, and savings rates have already started to fall. Many Americans are wondering what the changing dynamics mean for their finances.

If you're already retired or are close to it, the rate cuts are a bit of a mixed bag. Depending on what investments are in your brokerage account, that initial stock rally is reason for optimism. But the rate cut also signals the beginning of the end for eye-poppingly high savings rates. That will likely be a worry for anyone looking for safe places to park their cash.

Here are the good, the bad, and the ugly impacts of the Fed's rate cuts.

The good

Broadly speaking, rate cuts could help borrowers and investors.

Rate cuts may boost your portfolio

In theory, rate cuts can be good for stock market investments. If you have stocks or ETFs in an IRA or 401(k), economic growth could help your portfolio. The thinking is that as the Fed eases up on the economic brakes, it can be easier for companies to borrow and grow.

However, there are no guarantees. Historically, rate cuts haven't always triggered rallies. And some still fear the U.S. hasn't escaped a recession. Even so, the initial signals are positive.

Rate cuts could lower your interest payments

If you owe money or are looking to borrow, rate cuts will reduce the cost of that debt. In an ideal world, if you're nearing retirement, you'll be looking to pay down debt rather than add to it. But the sad reality is that increasing numbers of seniors owe money on their credit cards, mortgages, and more.

Rate cuts may be good news in terms of house prices

If you own a home and are thinking about downsizing, another knock-on effect of lower rates may well be higher house prices. It is difficult to predict what will happen to the housing market. But there's a good chance that demand will increase if mortgages become cheaper. This could, in turn, push prices up more.

The bad

Savers will be disappointed that the high rates they've enjoyed in recent years will start to fall.

Continued rate cuts will make CDs and savings accounts less attractive

As you near retirement, it can be tricky to strike the right balance of risk in your portfolio. You probably want to reduce your exposure to higher-risk assets because you have less time to wait out any short-term market fluctuations. Rate cuts make this even more challenging.

The high rates on certificates of deposit (CDs) and high-yield savings accounts have been particularly appealing to people looking for low-risk places to park their cash. Unfortunately, as rates fall, there will be fewer safe ways to earn decent inflation-beating returns on your money.

It's not all bad. Bonds have fallen out of favor in recent years, but they may offer a solid alternative to CDs as times change again. Bonds often perform well when interest rates are falling, and a number of experts say now is a good time to hold bonds.

The ugly

Inflation continues to hang around like an uninvited house guest who just won't leave, disturbing our sleep and eating our food.

We're still feeling the impact of inflation

Inflation is particularly painful for retirees whose carefully built nest eggs won't go as far. The Fed's decision to cut rates by 0.5% signals optimism that it can reach its inflation target. But it isn't quite there yet -- the Fed wants to reach 2%, and the latest consumer data put it at 2.5%.

The big issue for anyone approaching retirement is that prices won't go down again. Data from the Federal Reserve Bank of St Louis shows that groceries are about 20% more expensive today than they were four years ago. That's a difficult pill to swallow.

Not only is inflation still lurking in the background, but its impact means many would-be retirees have had to reevaluate their expectations. One Nationwide study showed that more than half the would-be retirees had delayed, changed, or canceled their retirement plans.

Key takeaways

As you approach retirement, government and federal money decisions can have an outsized impact on your life and plans. Even so, the changing rate environment is more of a glacier inching along than a snowball tumbling downhill. There's a lot to consider, but there's also no need to make any rash decisions.

Here are steps you can take today:

• Know where you stand: If you don't have a retirement plan, make one. Start by working out how much you'll need once you stop working. From there, you can figure out how you'll cover any shortfalls.
• Decide if CDs are right for you: CDs aren't for everyone, but if you want to lock in a CD paying 4% or more, there is still time to do so.
• Make sure you're comfortable with your asset allocation: Check your investment portfolio and make sure you're OK with the level of risk and mix of investments. Consider speaking with a financial advisor for extra help.

It's impossible to plan for every eventuality in retirement. However, if you've built a diversified portfolio and are comfortable with your retirement plan, you'll be well-positioned to handle whatever economic changes come your way.