Without guessing at when it could happen, firms are already preparing advisors for how a rise in interest rates could shift retirees’ investment outlook.

In the past few years, retirement planning has had to contend with historically low interest rates, which put some clients in a difficult position, according to Wesley Long, head of Private Client Services at Wedbush.
“A very conservative person traditionally has looked at buying something like a [Certificate of Deposit] that maybe yields four to five percent and they’ve set their retirement income up based on that percentage,” Long said. “Now with interest rates being at historical lows, that same four to five percent is now in the one-and-a-half percent range.”

That has pushed some clients to seek out riskier positions to try and make up for that return, Baird’s director of financial planning, Tim Steffen, said.

“Too often right now, people are finding those bonds just aren’t paying what they want them to and so they start chasing yield elsewhere and start getting into things that they otherwise wouldn’t have gotten into,” he explained.

According to Steffen, Baird is looking to capitalize on a rise in interest rates to realign client portfolios with more traditional and conservative allocations.

“The upside is that as rates go up, we’ll help people get their asset allocations back in-line,” he said. “We’ve been preaching it for a long time, but clients haven’t always been open to it.”

Alternatively, firms are also working to make sure their advisors and clients aren’t caught off-guard by some of the downsides. While yields for new bonds would go up, the value of some existing bonds would drop as interest rates rise. That may surprise retirees or investors who are worried about the day-to-day prices of their investments, Long said.

“If someone is holding their bonds to maturity, it’s not going to be as impactful to them,” Long explained. “But clients may be shocked when they look at their statements and they see the value of what they believe to be safe investment down dramatically because interest rates have risen.”

At Baird, Steffen is encouraging advisors to prepare clients to absorb some other aftershocks. As interest rates go up, so will their payments on debt or home equity loans.

“It’s working with clients to get the balance sheets in order,” Steffen said. “[We’re] reminding clients that this loan may be pretty inexpensive right now, but that isn’t going to last, so let’s start working on a system to start paying that down sooner than what you may have planned on.”

It’s also not too late to take advantage of some of the low interest rates to refinance a mortgage, for example, Steffen said.

The goal, Long and Steffen agreed, was not to time an inevitable rise, but to make sure that clients were prepared well in advance.

“People have been waiting on them to go up for a long time and they haven’t,” Steffen explained. “It seems like as long as the [Federal Reserve] keeps pushing the cash out they’re going to keep those rates down low. At some point, they’re going to come back and change.”

CHECK OUT: How Interest Rates Affect Retirement Planning

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