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6 reasons retirees love it when the Federal Reserve raises interest rates

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The promise of better returns on savings
No. 1: Paltry returns on savings © bikeriderlondon/Shutterstock.com

The promise of better returns on savings

In June 2006, the federal funds rate, the key interest rate that the Fed controls, stood at 5.25%. In September 2007, central bankers began lowering the federal funds rate and continued to do so until it fell to a range of 0%-0.25% in December 2008. It remained there until the Fed raised it a notch, to a range of 0.25%-0.50%, last December.

Rates on certificates of deposit (or CDs), money market accounts and savings also have stayed sunken.

The result has been devastating for retirees counting on safe, fixed returns, says Michael Rubin, founder of Total Candor, a financial planning education firm based in Portsmouth, New Hampshire.

"They're earning a lot less on their savings than any other time in recent history," says Rubin, author of "Beyond Paycheck to Paycheck."

However, even getting a sad-sack 1% return has been preferable for retirees than exposing their savings to higher risk, says Alan Moore, a financial planner and co-founder of XY Planning Network in Bozeman, Montana.

"I look at cash as market insurance," he says. "When the stock market takes a dive, (retirees) don't want to be in the position of having to sell stocks to fund their lifestyle."

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