Retirement Roadmap

Fed's Rate Decisions and Their Impact on Your Wallet

• Mark Fricks • Season 2 • Episode 30

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What if a 50 basis point interest rate cut could significantly alter your financial future? Join us as we unpack the Federal Reserve's recent decision and its far-reaching implications with insights from Investment Advisor Representatives, Mark and Evan Fricks. From the subtle shifts in credit card interest rates to the more pronounced effects on auto loans and HELOCs, we break down how these changes might impact your everyday financial decisions. Our discussion extends to the broader economic landscape, examining the Fed's strategy to manage inflation without tipping the economy into recession. Discover how continued rate decreases could lead to substantial long-term savings and why it's crucial to stay informed. These interest rate adjustments ripple through retirement planning and investment strategies, and Mark and Evan Fricks are here to help you navigate the shifts.

Have a topic or question you'd like Mark and Evan to address in a future episode? Email us at info@masterplanretire.com or call 770-980-9262.

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Call 770-980-9262 to speak directly with someone about your retirement planning needs.

https://masterplanretire.com/

Catch all episodes of our podcast at https://www.masterplanyourretirement.com/resources/episodes

Listen to Mark Fricks on Saturdays at 12:00 p.m. on XTRA 106.3 FM WFOM.
Sign up for one of our upcoming events at https://www.masterplanyourretirement.com/events

Purchase Mark’s book, The Road Less Traveled: Turning Your Retirement Worries Into an Excursion of a Lifetime, on Amazon: https://a.co/d/4fx94Al

Advisory services offered through MasterPlan Retirement Consultants, Inc., a Registered Investment Advisor in the state of Georgia. Insurance, tax and commodities services offered through Fricks and Associates, Inc. dba MasterPlan Retirement Consultants. The aforementioned are affiliated companies.

Speaker 1

Hey folks, welcome back and thank you for joining us. Welcome to Master Plan Retirement Consultants Retirement Roadmap. My name is Evan and with me, as always, retirement planner Mark Fricks. How are you, mark? I am doing great.

Speaker 2

How about you? I'm doing well. I could talk about all the things I'm doing this week, but I think nobody really cares. Yeah, probably not.

Speaker 1

Probably not.

Speaker 2

We're going to eat out tonight and then maybe tomorrow night cook some steaks, I don't know. Oh, that'd be nice.

Speaker 1

It's an awesome time of year, the leaves are changing. I was able to get up to North Georgia mountains last weekend and I'm doing that again this weekend. It's been perfect. Weather is perfect.

Speaker 2

Nice.

Speaker 1

Best time of year.

Speaker 2

Always a football game on. That's right College NFL somebody.

Speaker 1

Perfect time of year the leaves are beautiful and then we hit winter and somewhere around December, january, february it gets that Georgia bleak, hazy, gray days and it's just depressing for a little while and then you throw in the time change.

Speaker 2

That it's just depressing.

Speaker 3

And then you throw in the time change. That's right.

Speaker 2

That's right. Yeah, you leave work at dark and that's just sounds weird, feels weird, but we're going to enjoy where we are right now.

Speaker 1

That's right. That's right. So in September, the Federal Reserve announced a 50 basis point cut to its benchmark, the first reduction in borrowing costs since March 2020. Prior to the recent cut, the Fed had implemented 11 consecutive rate hikes over the past two years in an effort to tame inflation, which we all experienced, which inflation actually peaked at 9.1% in June of 2022. Yeah, do you remember that? Yeah, during this program, we're going to discuss what the recent news of a Fed rate cut means for the average American and, more importantly, fed rate cut means for the average American and, more importantly, what it means for your wallet. So, back in September, the Fed rate cut was 50 basis points. Federal funds rates now between 4.75 and 5%. So, first of all, mark what the heck is the federal funds?

Speaker 2

rate. That's basically what banks charge each other to borrow money back and forth, and so that drives everything else banks do. It drives what loans do credit cards, home loans, everything else. It's not directly tied. I noticed the other day, a couple of weeks ago, when they did the rate cut and mortgage rates came down a little bit. Then it crept back up a little bit. So it's not directly tied, but it certainly affects it very much so.

Speaker 1

We're hearing all this talk the layman in the news about inflation and rate cuts and how they interact. Can you describe a little bit how the federal funds rates affect inflation?

Speaker 2

So basically, by raising rate, supposedly, they're trying to create what I would call like a military recession. So they're wanting people to spend less money. I mean, it's harder to buy a car or a house or whatever if you've got to borrow the money and it's more expensive. It can affect a house payment by several hundred dollars a month, right, and so it slows down purchasing, which slows down jobs. You know, if you're buying less groceries or less people need it at the grocery stores, it's all a cooling effect.

Speaker 2

The problem that they run into which they've actually done a pretty good job this time, is not causing us to go into a deep recession, and it looks like we've avoided that. I mean, we're not out of the woods yet. I guess my worry right now is that the markets are so hot and I'm afraid that's creating a bubble, which is kind of a separate issue. But I think they've done a good job of, you know, ratcheting up rates a little bit at a time, maybe a little bit of misreading on the jobs reports. Now they've come back and said, oh, they were wrong. A lot more jobs were lost than we thought, and so I think that's why they cut them by a half a percent instead of a quarter a few weeks ago, because I think they saw those reports of jobs were a little bit higher than they expected. So it's just a way to cool the economy down, which cools the inflation rate down.

Speaker 1

Yeah. So we're going to talk a little bit how that might affect the average American on a day-to-day basis and just on, also on retirement accounts, and how that might affect investments as well. So here's how the 50 basis point interest rate cut will affect your payments, based on loan or credit type, and this is according to bank rate. So credit cards interest rates will drop by about 50 basis points. We know that With a couple of billing cycles, bringing the current average rate of 20.78% down slightly. So how does that look in real world numbers? For a balance of $5,000, it will amount to a few bucks off monthly interest payments. Yeah, not a big deal. Auto loans Now this is a fun one. Auto loans are fixed. Current rate about 7%. We're talking about that today with an employee who is looking at buying a car for her new driver in her family.

Speaker 1

I guess we might still want to wait for a couple more cuts before we take out some of these auto loans, but they are likely to continue trending downward. So payments for a new loan worth about $35,000 spread over five years would drop by $8 per month based on a rate cut of half a percentage point.

Speaker 2

Yeah, so again, not a big drop. But if they keep dropping that rate and we can get it down to maybe the three percent range or so, then you're looking at a car loan of maybe four or four and a half. Now you're talking about 40 50 bucks a month absolutely that's a big difference.

Speaker 1

Yeah, yeah. And then you put that over five years, that really starts that out up. Yeah, um, helox home equity line of credit. So payments on fifty thousand dollar heloc would decrease by about $20.84 per month. The current average rate is 8.68%.

Speaker 2

Yeah, and, as we know, HELOCs tend to run two or three percent more than a mortgage because of the reoccurring. You're only paying interest on it. Hopefully you're paying more, but you only have to pay interest on them. They're a little bit easier to get you can write a check and things like that, so they run higher. Be nice to see that down around the 5.5% to 6% range would be a nice spot.

Speaker 1

Would you say you're paying for the flexibility a little bit on the bond Some of it.

Speaker 2

Yeah, Flexibility pretty easy to get, and banks a lot of times they'll say no, you know, no setup fees, no closing calls, things like that as well. So you pay a little bit more for them.

Speaker 1

So mortgages will be affected too adjustable rate mortgages. So payments will drop slightly, but mortgages are less directly tied to the Fed's benchmark rate, so the amount of savings will vary based on the terms of the loan. But mortgage rates have been dropping and will likely drop more, but will not return to pre-pandemic rates, unfortunately.

Speaker 2

Probably not Four percent range. Three and a half to four would be nice. I'm not predicting anything.

Speaker 4

Right, no, no, no, you can't.

Speaker 2

It also depends on how many people are buying and taking out the loans too. So the mortgage rate is not directly tied to the Fed rate, but it certainly will float with it. But it's as I may have mentioned earlier, or maybe it was in our pre-show talk about how the rates, when the Fed lowered the rates by half a percent, mortgage rates came down. Then they kind of went back up a little bit and again it's kind of a supply-demand thing as well as what is the Fed rate.

Speaker 1

Well, I know it's felt like a lot of Americans have been locked out of the housing market because of a combination of just how expensive housing you're getting in certain areas, but then the rates being so high, it's been difficult for the average American.

Speaker 2

Yeah, really a double whammy. And and people are still buying houses, though I mean, it has slowed some and I think it's gonna slow further, but it, you know, it's just such a shortage of housing really left over. I think it kind of began in 2008, 2009, when the housing industry shut down and now you've got all the baby boomers wanting to, you know, go to a different style house. You've got a lot of millennials, which is like the next biggest generation coming along, finally getting into their homes. So it's just this combination. There are some people predicting a housing bubble might be bursting, so others like no, there's too many need for housing, so nobody really knows. But you know, I tell my clients, if you, if you don't have to buy right now, don't buy right now.

Speaker 1

Wait for the rates and maybe even kind of see where the market goes as well if you have equity in a home, now that it is a lot easier to transition to a new home. It's the first time. Home buyers that seem to be suffering the most right now.

Speaker 2

Yeah, I think so. And again, they're typically young families and so they probably have less cash built up, things of that nature. You can certainly go FHA, which is, like, I think, as low as 2%, down a little bit higher rate. That's a government sponsored, a government-backed type of loan, so that's, that's an option, but again it's going to be a higher rate, and right now that much higher because, again, because of the fed rates all right.

Speaker 1

So student loans how will they be affected? So federal loans are fixed. Private loans can be variable or fixed, so the impact will vary depending on what you have do. Be cautious about converting federal student loans into private loans. You may lose some of your flexibility there.

Speaker 2

Yeah, and I'm not a big expert on the student loan and how they all work, I do know that a lot of people do convert to private. I'm sure there are positives and negatives.

Speaker 1

That's something that you probably want to do some research on, and I haven't either done any research on this any deeper than this but if you convert your federal loans to private loans, then you might miss out on some loan forgiveness in the future from the government, if that comes about. Could be, if that happens, yeah, high-yield savings accounts. Now these have become very popular over the past few years, and for good reason. They're finally paying something right, they're finally paying something.

Speaker 1

That's right. They're finally paying something, but because of the past rate hikes top yielding online savings accounts, the rates have made big jumps and they're currently paying more than 5%. They will now likely drop some, though they're probably still in pretty good shape.

Speaker 2

Yeah, for a while. Again, as the Fed I think over the next 12 to 18 months slowly lowers that rate, those savings accounts will begin lowering as well. Will they ever get down to like a one or a half? Probably not, but again we'll have to wait and see. But a great time to take advantage of that 5% give or take and even CDs I mean there's still CDs If you don't mind locking up money for six to 18 months, maybe lock it in in the next few months while the Fed still has the higher rates and take advantage of that over the next year or so, because I think in a year those CDs will be paying 3% to 4% again, which is not beating inflation. So it's kind of a nice time right now to maybe consider. I'm not a big proponent of CDs typically, but again, right now they're paying higher than inflation because inflation has dropped. What are we at?

Speaker 2

three, three point six right now, something like that three and a half, three point six this is november 2024 by the way for a time mark, this good this number could adjust by the time it's good on the month, a little slow in the year.

Speaker 1

Yeah, concerned about that well, the pandemic threw everyone off. We we're missing a couple of years in there somewhere, that's right yeah, so.

Speaker 2

So uh again, just you know, check out your local bank and maybe even online CDs. Don't put all your money there, but take advantage of that while you still can. Yeah, yeah.

Speaker 1

We'll talk a little bit more about those CDs too, because right now they will be paying more than they will after a couple more cuts, Exactly so everything we've discussed. These numbers may not seem like much on a monthly basis, but all these numbers do add up quickly and we are anticipating more rate cuts in the future, so that will snowball and add up over time and especially the big items again, the housing, the car, you know the newer or you know slightly used car, you start looking those big numbers, that 2% can make a big difference.

Speaker 1

Well, these are debt producing instruments or, you know, vehicles, what, whatnot. So those, those do matter. Now, the rate cut isn't likely to provide significant relief for household budgets right now. Credit card rates will likely go down slightly, but not significantly.

Speaker 2

But again, it's a looking forward, step-by-step sort of situation but might be more helpful than it has in the past, because I was reading a graph through the day where credit card debt has skyrocketed. The amount of money people are saving has gone down. Credit card debt has gone up tremendously. So any rate cut would help and hopefully people can start chiseling away at those balances. Yeah.

Speaker 1

Well, sometimes it's helpful to talk to a financial professional about your own budget.

Speaker 2

That sounds like a great idea. I mean, how can we do that?

Retirement Income and Investing Strategies

Speaker 1

I think I would go to masterplanretirecom, click the Schedule Now button. It's right there in a big green button, right in the center of the webpage. That'll take you directly to Master Plan's calendar. You can find a time that works best for you to discuss your own retirement, your hopes, your dreams, your fears. That's two complimentary consultations, technically. The second is a series of reports presented to you with an outlook for your own retirement. That's masterplanretirecom, or call us at the office, 770-980-9262. You know, wouldn't you want to?

Speaker 2

know where you stand. I would I mean, wouldn't you want to know? Am I on track to be able to retire? Can I retire in five years? Maybe three years? Is it going to be 20 years, or whatever it may be? It'd be nice to know where you're at, because if you don't know where you're at, you can't figure out how to get where you want to be.

Speaker 1

It's hard to make that first step for a lot of reasons. Sometimes it's just there's so much in life to think about it's hard to plan ahead and think about well, that's 10 years, five years, whatever, that's the future. Even as long as I don't know, I don't have to worry about it or I'm not ready emotionally to think about what could potentially be news that I'm not ready to hear or I don't want to hear about, I'm afraid I might be behind or just having no clue. But the first step is knowledge.

Speaker 2

Yeah, and fear comes from the unknown. I mean, at least if you know, it's kind of like going to the doctor, especially when you're younger.

Speaker 2

But if I don't go, everything's good even though I may not be good, right, but definitely, you know, go to the website, give us a call, schedule that appointment. We're very easy to talk to, okay, we're very easy to listen and find out where you're at and what you care about and where you want to be. And again, those reports can be very revealing and you may look at them the first time and go, oh no, I'm behind, but we can show you how to get ahead, and so that's part of what we do. So, yeah, make sure you do that. Masterplanretirecom.

Speaker 1

So we did discuss how these rate cuts might not greatly affect household budgets right now, but one place they may have more significant impact would be on investments. So, first of all, how does the cut affect interest-bearing retirement accounts?

Speaker 2

Well, again, interest-bearing retirement accounts, and I guess you mean something like a savings or fixed.

Speaker 1

Fixed.

Speaker 2

It could be bonds, it could be CDs, yeah that's going to lower those rates and again, we're not big proponents of using a lot of that because they typically don't keep up with inflation. You need that growth and people that sit in bonds for 20 years or like a federal worker, sitting in the G fund, which is government bonds. They're following inflation by 1% give or take and so you're actually losing ground, but it will lower those rates and again you've got to search for. So where can I make my money? And, as you know, we were proponents of the stock market for the growth years for that, over time, the market makes money and so don't be afraid of that. If you need help, maybe with your 401k, we can give you some guidance on what to be in things like that. We even manage 401ks for some of our clients as well thrift savings plans. But you've got to participate in the market if you really want to beat inflation, because over time, again, it's the only thing that beats inflation consistently.

Speaker 1

Now it can be tricky because a lot of people use interest-bearing vehicles in retirement specifically for income, and so if we're seeing a drop in rates, are we seeing a drop of income in retirement?

Speaker 2

Yeah, that's the other thing. If you're using bonds and CDs or other instruments that you're like, okay, I'm going to collect the interest off these bonds. That's my income. Well, that income is going to go down. With the newer bonds, that's my income. Well, that income is going to go down, you know. You know, with the newer bonds, hopefully, maybe, if you're a bond person, which really bonds have really, I'm not going to say fallen out of favor, but certainly are not as popular as they were many years ago.

Speaker 2

Because, again, they're not. They're not keeping up with inflation, they're not producing what you need to produce. You know, if you need, let's say, 4% income income, it's hard to find a lot of bonds that will pay that consistently. That's the problem is the consistency of it, and so just when you think you're getting enough in, then bond rates start dropping. You're getting less money.

Speaker 2

It's the same thing with dividends. You know now, I love dividends. I mean, and if you don't know what a dividend is, it's basically, um, you know, the sharing of a profit of a stock. So if Coke makes a profit, they share that profit with those folks that own their stock. But dividends can fluctuate and they're not guaranteed, and when a company's stock is getting hit or bad economic times, dividends drop pretty drastically. So, again, that's not necessarily a great way to produce income, but definitely when you've got something that's again like a bond or interest-bearing account, that income is going to go income. But definitely when you've got something that's again like a bond or interest-bearing account, that income is going to go down. You better have a backup plan or maybe a different plan.

Speaker 1

Now this is a good opportunity, if you do currently hold bonds, to speak to your financial professional, because there is some nuance here. If you currently hold bonds pre-cuts, they actually will be worth more after a few cuts.

Speaker 2

Exactly, and especially if you're trading bonds. We have portfolios where bonds are traded, and so the bonds that these portfolios have been buying over the last 18 months to 24 months have been paying much better, and so now, as the rates come down, these portfolios start trading those bonds and getting more dollars for those more valuable bonds. So that's a nice place to be. We think a couple of our bond portfolios which are liquid because they are portfolios are going to do very, very well over the next 18 months as the Fed starts lowering rates.

Speaker 1

Another income producer in retirement that's a very popular vehicle is the fixed annuity. Those will be affected by rate cuts as well, yeah.

Speaker 2

So fixed annuities you know that rate can change, I don't know. It depends on the annuity and how it's set up. But they typically pay kind of like a CD, and so again you're looking at three to 5% long-term. That's not a lot of growth. It's not really keeping up with inflation. Some folks look at the variable annuities. You know there's three types of annuities. There's three types of annuities. There's a fixed annuity which pays like a CD. There's a variable annuity. The word variable means it's in the market, so you have the risk of loss and they did very well in the 80s and 90s when the markets were doing so well.

Speaker 2

But I don't know if folks know this or not, but since the year 2000, the market has averaged, up until the end of last year, 6.26%, not the 8% we always hear the market averages. Now is that going to continue? I don't know. But I do know the markets are more volatile, the world is more volatile, world economy, all these things. So if you've got a variable annuity and it's paying 6% to 7%, fees on variable annuities are very high 3% to 4% so you're clearing 2% Again. You're not beating inflation. Variable annuities are very high 3% to 4%. So you're clearing 2% Again, you're not beating inflation. So that's why we're big proponents of the hybrid index annuity. It's kind of the best of both worlds. So it follows those markets.

Speaker 1

Did you want to get into it? No, no, I was just reiterating what you were saying. If it's the 90s and you have a variable annuity and it's returning 16% one year, maybe 3% fee or 4% fee doesn't matter quite as much to you, although it's still a chunk. But yeah, 2000 and on that, those, those fees just cut into your growth especially like you said yeah we're not earning as much and that, but that's a great point.

Speaker 1

So we we know that the fixed annuity is going to be affected by the cuts. So we also know that the market is a great place for investments, for growth, to combat inflation. But we don't want our variable annuity. And you were just about to start speaking about a hybrid index.

Speaker 2

Chewing up all the fees, chewing up your returns. So we've shifted over the last several years to the and it's one of the most popular financial instruments now and it's the hybrid index annuities. So basically it follows a market index up, like the S&P 500 or the Dow Jones or whatever you pick, follows it up, takes a portion of that return and, depending on the annuity, it could take 80% of the return, it could take 120% of the return, but when the market goes down it locks in the principal. So we've seen over time that these are pretty well producing six to 8% on average. That's not bad when you consider you're not losing money in the bad years. And so we use it for two purposes.

Speaker 2

Number one it spits off income between four and 8%. That's pretty darn good. And it's guaranteed for life and if you're married, guaranteed for life for both of you if it's set up correctly and it never ends. The bucket becomes zero and it never ends. And so you know, I tell folks when they come and I say, by the way, you already probably hold it Well, it does end when you die, when you and the spouse end.

Speaker 1

Good point.

Speaker 2

Good point. So it does end. I'm sorry, a little disclaimer there, but it's a great tool because we know what it can produce. We've seen it work and it's just billions of dollars flowing into these instruments over the last several years and it's our favorite income producing.

Speaker 2

I tell folks when they come in, you probably already own an annuity. They're like I don't think. So yeah, it's called social security. It's a very simple concept. It's just something and in fact, if you look at the language in the Social Security code, you will see annuity language because it was based on annuities and so if you already have one, all it is is something you put money into so that one day you get a guaranteed income stream. So I want to maximize that stream. I want to make sure it doesn't end until you end right and hopefully even keep up with inflation. Some of those actually will increase each year and so you keep up with inflation. So they're great tools for that and they're not affected by interest rate cuts or increases. It's based on, again, the markets and the indexes, so it's a great tool.

Speaker 1

So we know that the interest cuts can. Interest rate cuts can negatively or at least slow some more interest bearing retirement vehicles. However, it can drive market returns. Now we know that every third to fourth year.

Speaker 2

the market is going to correct, whether it be a bear market or whether it be a correction or whatever. But you figure, seven or eight years out of every 10, we're going to be in the positive. But especially when the market looks around and says, hey, we like these rates coming down, you know, and so there, that's why we've had such strong markets. I think eight of the 11 major markets around the world are hot, which again concerns me a little bit, because there's always a correction somewhere down the road. But because we use actively managed accounts, we can pivot very quickly and move out of a market if we need to be out of it. But yeah, the interest rates do help, just like corporate tax cuts. You know, when the 2017 tax cut bill was passed, the market reacted positively because that means corporations make more money, because they pay less taxes, which means their stocks do better. People make money in the market, more people go to work for the companies because they have more money to hire people, so it's really a positive trickle-down effect.

Speaker 1

Well, even more reason, and it just goes to show us that. So much reason for a well-built, solidly built plan, balanced plan to not only weather rate cuts but also tax increases.

Speaker 2

Stock market fluctuations, Fair markets sure.

Speaker 1

Anything else that retirement can throw at you. That's why you have to have a plan. Situations, bear markets, sure, anything else that retirement can throw at you.

Speaker 2

That's why you have to have a plan. You really have to have a plan, and you know the plan is a plan of making every piece efficient, more efficient, which, as a combination of that, makes it a stronger overall plan, but also considering what could go wrong. Again, you know, whatever may can happen needs to be part of that plan.

Speaker 1

Sounds good. Well, Mark, that's our time today. Any parting words?

Speaker 2

I just wish everybody a great week and remember plan well and prosper, take care.

Speaker 3

This was Retirement Roadmap Radio with Mark Fricks of Master Plan Retirement Consultants. To schedule a complimentary consultation, go to MasterPlanRetirecom or call 770-980-9262. Thanks for listening and remember plan well and prosper.

Speaker 4

All matters discussed during the show are for informational purposes only. Each individual situation may vary and the opinions expressed here may not apply to everyone. Materials presented are believed to be from reliable sources and no representations can be made as to its accuracy. All ideas and information should be discussed in detail with one of our qualified representatives prior to implementation. Advisory services offered by Master Plan Retirement. We'll be right back.