Rising Interest Rates & Your Retirement Portfolio

Rising interest rates can have both positive and negative effects on your retirement portfolio. Here’s what to look out for as we enter a new rate hike cycle and how to prepare accordingly.

For two years, the Covid-19 pandemic has presented a variety of new challenges to our health, our lifestyle, and of course, the economy. True, the ensuing economic recession ended up being the shortest in U.S. history. Yet we’re still feeling the impact of ongoing labor shortages and supply chain disruptions.

One of the most pronounced effects of the pandemic in recent months is record-high inflation levels. As a result, the Federal Open Market Committee (FOMC) announced that they’d begin tapering their quantitative easing program to combat rising prices. The FOMC also acknowledged that they’d be willing to accelerate their tapering program and/or raise interest rates sooner if necessary.

Indeed, it appears we are in for multiple interest rate hikes in 2022—the first one potentially taking place as soon as next month. But it’s been several years since the Fed launched its last rate hike cycle. Many of us have grown accustomed to near-zero interest rates. If you’re nearing or in retirement, you may be wondering how rising interest rates may affect your retirement portfolio. In this article, we’re sharing four things to look out for as we enter a new rate hike cycle and how you can prepare your finances accordingly.

Consider these four ways rising interest rates may affect your retirement portfolio:

#1: Personal Debt

When the Fed talks about raising interest rates, it’s referring to the federal funds rate—the overnight borrowing rate for banks. However, this rate influences the prime interest rate, which lenders use to determine interest rates for credit cards and other loans, including mortgages.

Housing tends to be one of the largest, if not the largest, expense for retirees. And while mortgage rates have been relatively low for borrowers with strong credit, the Mortgage Bankers Association expects the average 30-year fixed rate to increase to 4% by the end of 2022. That means if your current rate is 3% and you have a 30-year mortgage on a $300,000 home, your monthly payment will increase by nearly $150.

For some people, an extra $150 each month may seem nominal. But for those living off savings, a sustained increase in monthly expenses can dramatically impact your retirement portfolio over time.

If you have the resources, you may want to consider paying off your mortgage ahead of schedule. This would eliminate the expense entirely. Alternatively, if you have a variable-rate mortgage, you may want to refinance to lock in a lower fixed rate before interest rates potentially rise.

The same is true for other loan balances you may be carrying. If you have lingering student loans, business loans, or credit card debt, now may be a good time to get serious about paying those off once and for all.

#2: Investments

Your current investment portfolio and asset allocation largely depends on where you are on your retirement timeline. If you have several years until retirement, you’re likely more heavily weighted towards stocks and other growth-oriented investments. However, if you’re nearing or in retirement, you may have a higher allocation to bonds and income-generating securities.


In general, bond prices fall as interest rates rise. Bond investors understand this concept as interest rate risk. As governments and private companies issue new bonds at higher rates, old bonds become less attractive and therefore lose value.

However, not all bonds are equally sensitive to interest rates. Their sensitivity is measured by duration; the longer a bond’s duration, the more sensitive it is to changes in interest rates. If your retirement portfolio is heavily weighted towards bonds, one way to reduce interest rate risk is to shift your portfolio towards shorter duration bonds.

In addition, higher yielding and lower quality bonds tend to be less sensitive to interest rate changes. However, it’s worth noting that these types of bonds can introduce other risks to your portfolio.

On the other hand, if you have a longer time frame to invest, you may not want to make any changes to your portfolio. Bonds that eventually mature can be reinvested at higher rates, which can actually be beneficial for many retirees.


When interest rates are low, it’s cheaper for businesses to borrow expansion loans. This is generally seen as favorable for the economy. Thus, equity investors typically react negatively to the prospect of rising interest rates and slower growth.

At the same time, bonds and cash often become more attractive, relatively speaking, as interest rates rise. This can cause stocks to lose value as demand shifts from equities to income-generating securities. And as personal debts become more expensive to service, consumers tend to spend less, further driving down stock prices.

But that doesn’t mean you should abandon your equity investments altogether. Markets typically dislike uncertainty above all else, and the Fed has been very transparent about its intentions to raise rates. Nevertheless, it’s possible that stock investors will experience heightened volatility as the Fed works to combat inflation. A diversified portfolio can help mitigate these risks.


You may also be concerned about how inflation will impact your investments. Though tapering and rate hikes are intended to curb inflation, it may take time for the Fed’s tactics to be effective.

In the meantime, there are actions you can take to protect your retirement portfolio. First, make sure you’re not holding too much cash. Although cash feels safe during periods of uncertainty, it can lose value quickly when inflation is present. Be sure to have enough saved to cover planned expenses and unexpected setbacks. But be careful not to hold more cash than you need.

If you have at least 10 years until retirement, stocks are typically the most effective way to combat inflation and maintain purchasing power. Indeed, consumer prices rose 7% in December 2021. Still, the average annualized rate of return for the S&P 500 over the last 10 years was 9.55%, according to FactSet. In addition, the price of commodities historically correlates with inflation, making commodities a potential hedge against rising prices.

As you near retirement, it’s generally a good idea to shift your retirement portfolio into less risky asset classes like fixed income. You may want to consider investing a portion of your assets in Treasury inflation-protected securities (TIPS), which are backed by the U.S. government and rise and fall in value based on inflation levels. The same is true for those in retirement; protecting your portfolio against rising prices can help ensure you don’t draw down your assets too quickly.

If you’re worried about how your retirement portfolio will react to inflation and/or rising interest rates, the best thing to do is review your investments with a trusted financial advisor like Milestone Asset Management Group. We can help you assess your risks and determine if any changes to your investment plan are necessary.

#3: Savings

With interest rates close to zero for the last several years, savers have earned virtually nothing on cash. Currently, the average interest rate for savings account is 0.06%, according to Bankrate’s weekly survey of institutions.

When it comes to rising interest rates, one silver lining is that you can earn a higher rate of return on your cash. However, don’t expect a dramatic change immediately. Deposit rates are typically much slower to respond to changes in the federal funds rate.

#4: Defined Benefit Plans

Lastly, if you have a defined benefit (DB) plan, you should consider how rising interest rates may impact it. Many DB plan sponsors offer lump-sum payouts to terminated vested participants to reduce plan costs and risk. The payout is calculated using a formula that considers a variety of factors, including interest rates. Generally, there’s an inverse relationship between interest rates and the lump sum a participant receives.

With interest rates near zero for so long, the lump-sum payout may have been an attractive option to DB plan holders. However, with interest rates set to increase in the near-term, that may not be the case for much longer.

The actual impact to your retirement portfolio depends on your plan details and the options available to you. Your DB plan administrator or HR department should be able to provide you with the information you need to make an informed decision. Alternatively, you may want to consider working with a financial professional. They can help you weigh your options within the context of your overall financial plan.

Bottom Line: Rising Interest Rates May Impact Your Portfolio, But Don’t Panic

Like many things in finance, interest rates tend to be cyclical—hence the term “rate cycles.” With rates at historic lows for so long and inflation on the rise, it’s not surprising that a series of rate hikes is likely in our future.

However, no matter where you are on your retirement timeline, it’s important not to panic. A long-term financial plan considers external factors like interest rates and often has safety valves built in to relieve pressure during periods of uncertainty. Unless your circumstances have changed, there’s often no reason to make dramatic changes to your financial plan.

As always, we believe proper planning is essential—especially when it’s unclear what the future holds. If Milestone Asset Management Group can help you evaluate your retirement portfolio and develop a plan that helps you sleep at night, please contact us to schedule an introductory meeting.