The wait is over. The Fed has made its move. Now you can revisit your retirement plan and, best case, tweak it or, worst case, overhaul it. And what you do might depend on the degree to which you already prepared for the Federal Reserve raising interest rates, as it did a little over a week ago, from near zero, to a range of 0.25% (one-quarter of 1%) to 0.50% (one-half of 1%).
If you prepared for this day, which everyone knew would come, there are just a few adjustments that you have to make to your assets and liabilities. Here's what experts suggest:
• Do nothing. Steven Gattuso, a senior portfolio manager at Courier Capital in Buffalo advises against making any major changes to your portfolio. "But do keep your eye on the Fed to determine if investment changes should be made to take advantage of higher rates," he says.
Others agree. The markets have fully digested the anticipated rate increase, according to Thomas Warschauer, a professor of finance, emeritus at San Diego State University. Given that: "I wouldn't change stock holdings much on that account," he says.
Warschauer does, however, recommend tweaking your stock portfolio. "Uncertainty regarding growth in Europe and commodity price deflation is more troublesome, and I would lighten up securities dependent upon those," he says.
History shows commodities tend to beat bonds in rising-rate times
• Don't worry. "It wasn't a meaningful rate hike and I seriously doubt the fed funds rate will get to any 'normal' level for years," says Vahan Janjigian, chief investment officer of Greenwich Wealth Management in Greenwich, Conn. "I also don't think the rate hike will have any significant effect on the long end of the yield curve."
• Consider more stock. Others, however, suggest increasing the percentage you allocate to stocks. "They cannot rely on bonds to the same degree they've been used to over the last several decades," says Jerry Miccolis, founder of Giralda Advisors in Madison, N.J. "The 30-year bull market in bonds is officially over. In my view, the next generation of the standard 60/40 portfolio might look more like 80/20, where the 80 component contains equity investments that have explicit downside risk management built in."
• Buy downside protection. Speaking of downside protection, another expert suggests buying insurance for your portfolio. "Though a bit advanced, I would like to think many retirees would start to utilize options to generate additional portfolio income and cushion downside risks," says Jonathan Masse, an options strategist with Masse Capital Markets Consulting (MC)-Squared in San Ramon, Calif. In essence, you would do this by selling against the stocks you own. A call is an option to buy assets at a specified price on or before a particular date. When you sell a call, someone is paying you money to buy your stock at that agreed-upon price. This strategy, often referred to as writing a covered call, provides income and locks in the price at which you would sell your stocks. Now you might ask, "Why would I want to sell away my upside?" The answer, says Masse, is that upside is overpriced. "Sell it and capture the income," he says. "Over the long run and through a vast many market cycles ... the covered-strategies — both calls and puts — give you long-term equity returns at two-thirds the risk. Therefore, if you like money and sleep, it should appeal to an investor." Visit this CBOE website to learn some strategies.
• Ladder CDs, bond and annuity contracts. Stagger the purchase of annuity contracts, preferably over a period of years if possible and ladder bonds and defined-maturity bond funds, suggests Charles Rotblut, vice president of the American Association of Individual Investors. Also, ladder CDs or — at the very least — pay close attention to the penalties for early withdrawals. "Depending on the interest rates, it might make more sense to use the flexibility of a money market account rather than a CD, Rotblut says.
Borrowers' interest rates already rising, but savers' rates aren't
• Invest cautiously in real estate. "Real estate is another matter," says Warschauer. "Some regions are very interest sensitive, while other markets are not particularly interest sensitive. Retirees shouldn't be in real estate unless they know that much about their markets."
• Fix or eliminate debt costs. According to Warschauer, some HELOCs (a home equity line of credit) come with an option to fix the interest rate at any time at current rates. If you have this option, do so. And, if you haven't done so already, and it makes sense, refinance your mortgage. You're about to run out of time for that option, says Warschauer.
As for credit card debt, Warschauer says retirees have no business holding balances at any time. If you are carrying balances, consider using a calculator such as those found at BankRate.com or Vertex42.com to determine the best way to pay down your debt.
Robert Powell is editor of Retirement Weekly, contributes regularly to USA TODAY, The Wall Street Journal and MarketWatch. Got questions about money? Email Bob atrpowell@allthingsretirement.com.
