How the Fed rate hike affects retirement savings

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So the Federal Reserve raised rates by a quarter of a percent. It’s too early to tell the impact of the latest interest rate hike on the stock market. Just after the announcement, the Dow Jones industrial average slipped a bit and then recovered.

As always, the advice for retirement savers is to make sure your portfolio is built to withstand market shocks.

“Investors need to look at long-term trends,” says Scott Hanson, a Certified Financial Planner professional at Hanson McClain in Sacramento, California. “Don’t focus on what happens quarter to quarter.”

This latest rate hike brings the Fed’s key interest rate up by a quarter-point, to a range of 0.50 to 0.75 percent, from 0.25 percent to 0.50 percent. The move is a sign that the Fed feels confident in the U.S. economy; central bankers are even projecting the possibility of three more rate increases in 2017. (But they said there would be four this year, yet there was only one.)

You may feel some impact from the Fed move if you have an adjustable-rate mortgage or if you carry a balance on your credit card. But investing for retirement is a decades-long project. Keep your eye on the long view, not the daily or weekly occurrences.

Fun fact: The Fed talks about increases in terms of “basis points,” which is dividing each percentage point into 100 parts. So 25 basis points is the amount of the increase.

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Explain rates like I’m 5

If the Fed’s policymaking panel were a popular children’s book — say, “If You Give a Mouse a Cookie” — it might go something like this: When interest rates go up, returns in a savings account are higher and people tend to save more. If people save more, they spend less.

If people spend less, the economy slows. If the economy slows, fewer companies will offer jobs. If fewer companies offer jobs, then people have less money. If people have less money, prices become cheaper. When things cost less, inflation is lower.

Fun fact: A September headline said that a disappointing jobs report meant that the probability of a rate hike in October was less likely — because the economy and inflation were less likely to heat up. See? It’s all connected.

When the Fed raises rates, it’s great for people to get better returns and save more. But it’s not so great that they spend less. Also, fewer jobs in a slower economy is not a good thing. On the other hand, when reduced spending creates cheaper prices and helps rein in inflation, that’s a positive.

Because nothing happens right away, you can expect a lag of about a year for any impact from the rate increase to really be noticeable.

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Jill Cornfield

I'm a reporter at Bankrate, talking retirement – my own as well as yours. Sign up for my free newsletter.