The silver lining in a rate hike

Rising interest rates and your retirement savings

When the Federal Reserve on Wednesday delivered its first interest rate hike in close to a decade, the move capped months of waiting and watching by investors and market seers alike.

And with a number of economic indicators, like wage pressure, still low, many market watchers are wary, with some wondering if the economy is strong enough to handle higher rates.

Still, for some people, higher interest rates stand to be a very good thing indeed. It just may not be the people who usually benefit when rates rise, at least in the short run.

Consider retirees and others living on their income from savings and programs like Social Security. It would seem obvious that a rate hike would help them because they would earn more on their investments.

That could happen again — but not right away, according to Barry Glassman, president of Glassman Wealth Services. "The first move signals that we are headed in the direction where retirees and conservative investors may someday get some yield back," he said. "But not today."

True, a quarter-point rate hike could quickly pass through and affect money market rates. But Glassman pointed out that firms offering money market funds have been waiving at least some of their fees for years in an effort to keep net rates on their funds from going negative. They waived an aggregate $6.3 billion in fees in 2014, up from $5.8 billion in 2013, and they are on track to waive another $5.6 billion in 2015, according to the Investment Company Institute.

Glassman said those same firms may be among the first beneficiaries of a rate hike. "A zero interest rate policy has been sucking billions out of brokerage firms around the country," he said. If short-term rates rise enough to give them a margin to charge for their services, "a lot of brokerage firms can now charge the fees that are in the prospectuses."

Some other experts, like Mike Krasner at iMoneyNet, question whether the firms will in fact rush to re-impose their maximum fees.

"It seems to me that yields would have to rise substantially before any firm could attempt to justify such a move, as it would undoubtedly prompt some investors to move their cash to another fund family, to a bank or somewhere else." Money market fund providers "are in an extremely competitive industry," he said.

But Krasner noted that firms have already started reducing the size of their fee waivers. And clearly, higher rates could at least give firms the option to impose a larger portion of their fees.

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Other segments of the financial services industry could also benefit. "Those who are going to be the most excited about this are the pension funds," according to Richard Salmen, senior vice president and manger of financial planning services for BOK Financial.

"They have fixed obligations they have to meet. They know how many people are going to retire and how much they have to pay out to them, and they have not been able to make money on their cash."

Life insurance companies are in a similar situation, Salmen said. "If they have a block of life insurance policies they think are going to pay out in 30 years, they buy 30 year bonds — except you can't make money on those now." If long-term interest rates rise in response to the Fed's move, that would help them generate more income to cover those policies.

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Glassman pointed to another group that may be welcoming a rate hike with open arms: Realtors. Home buyers and sellers who have been on the sidelines may decide that this is the time for them to move, before mortgages become noticeably more expensive.

"What we have seen is when interest rates start to tick up, people start to sell, he said.

In general, though, Salmen is watching for what the Fed does next — whether Wednesday's rate hike will be followed by several more in 2016.

For example, a series of rate hikes in the United States at a time when other central banks are cutting or maintaining rates could mean a stronger dollar. That would be hard on U.S. exporters, but consumers could benefit.

"The American consumer is going to be able to buy Japanese electronics, German cars, all those things" more cheaply, Salmen said.

It could also benefit people overseas awaiting remittances from family members in the U.S., Glassman said, since payments they make will be more valuable against other currencies.

And eventually, both Glassman and Salmen expect people living on their savings, like retirees, to gain from higher rates.

At present, people are living on reduced income or reaching for the interest income they need and buying assets, like dividend paying stocks, that may be riskier than they intend, Salmen said. "We need to get back to a normalization of interest rate policy so people are taking the appropriate risk with their money and they are not stretching the way they are now."

After more than nine years, a rate hike seems almost exotic, let alone a series of them. But if you watch for opportunities to take advantage of the changing environment, it could be just the thing your personal finances need.