Will falling interest rates derail your retirement plans?

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BUSINESS NEWS - When planning for retirement, interest rate changes can have a big impact on the performance of your investments and your long-term financial security. The tricky part is that this impact will be felt when interest rates rise, and when they fall.

The recent lowering of the interest rate and the expectation of more cuts in months ahead can have a negative effect on your portfolio performance if it isn’t correctly balanced.

As you plan for the future, it’s important to consider how your portfolio might react and what adjustments can be made to align with your retirement goals.

We always recommend that your portfolio should have a mix of different asset classes that let you ride out these swings in interest rates and market cycles.

Fixed-Income investments
When in retirement, fixed-income investments often serve as a cornerstone of a stable financial plan. What you need to know is that the value of existing bonds tends to increase when interest rates fall because their fixed payments would be higher than newer bonds with lower yields.

Option to consider: Extending the duration of your bond holdings can help lock in higher rates for a longer period, giving you more stability as you navigate your retirement years.

If you’re drawing income from discretionary or living annuities, consider allocating roughly three years’ worth of income into bonds or similar fixed-income investments.

Listed equities
Equities play a crucial role in most retirement portfolios, especially as a proven solution to combating inflation that will grow capital over the long term. In a low-interest-rate environment, dividend-paying stocks can become more attractive because they can offer higher returns than bonds or savings accounts.

Option to consider: Focus on high-quality dividend stocks that make stable and consistent payouts. These can help supplement your income during retirement, particularly when fixed-income vehicles under perform.

Real estate
Investment property can be an important asset class for retirees when interest rates drop. Lower rates can make property investments more affordable, reducing your monthly mortgage costs and increasing property values.

Option to consider: If you have existing rental properties, falling interest rates may boost the value of your properties, allowing you to benefit from a higher valuation and rental income. This extra income can offer more flexibility in retirement, letting you diversify your portfolio further or reinvest in other areas for growth.

Alternative investments
If you’re concerned about market fluctuations, alternative investments like commodities can offer a hedge against uncertainty. Gold, in particular, performs well when interest rates fall because lower rates can weaken currencies and raise inflation expectations.

Option to consider: Adding physical gold to your portfolio through exchange-traded funds (ETFs) could help lower the risks when interest rates and inflation fall.

Cash and cash equivalents
While cash and cash equivalents might offer a sense of security, they often lose value in a low-interest-rate environment. The returns you’re offered on savings accounts and money market investments will be lower, making it harder to generate above-inflation income from these sources.

Option to consider: Instead of holding large amounts of cash in low-yielding accounts, consider reallocating excess cash to higher-yielding investments.

Currency and International Investments
Changes in interest rates can also impact international investments, especially when it comes to currency fluctuations. As South Africa investors are aware, a weaker currency can quickly erode the value of your assets if not managed properly.

Option to consider: Consider diversifying your investments into international assets that may benefit from these currency shifts. Partnering with a fund manager who can adapt to these shifts can help ensure that your international investments remain resilient over time.

Adapt to protect your retirement
Retirement planning requires constant adaptation, especially when interest rates fluctuate. In a falling interest rate environment, options that we’ve just discussed can help protect and grow your retirement portfolio.

*Johan Burger, CFP®, is a financial advisor at Brenthurst Wealth George johan@brenthurstwealth.co.za