What boomers need to do about tomorrow's higher interest rates

A Baby Boomer's Perspective on Higher Interest Rates

by Gary Foreman

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If you're a baby boomer you've seen your share of interest rate changes over the years. We were raised in an era where a passbook (with a real pocket-sized book listing deposits and withdrawals!) earned you a whopping 3%. We also saw mortgages in the 12%+ range during the late 70's and early 80's. Now we're seeing CD rates of 1 and 2%, so it shouldn't be any surprise to us that interest rates will continue to change. In fact, it's becoming clear that this period of extremely low interest rates is ending and that interest rates will be higher in the future.

But how high will they go? And what does that mean for you?

Lots of experts are trying to answer those two questions. I think that two facts and a little common sense can give us a pretty good feel for what the future might bring.

There are a few reasons why I'm pretty sure that interest rates will rise. Perhaps only a percent or so, but still higher than they are today.

First, the Federal Reserve has begun the process of raising rates. They've also signaled that they intend to continue to raise them further.

Second, the American consumer has pulled out his credit card again. Beginning in 2008 consumers started paying off their debts. But by 2011/12 that started to change. Revolving credit (think credit cards) has gone from a total of $845 billion in 2012 to right at $1 trillion today.

Third, consumer confidence hasn't been this high in years. According to the University of Michigan their consumer sentiment index went from a low of less than 60 to nearly 100 today. When consumers are confident they spend more and borrow more. The demand for money goes up. That typically increases the cost of money (the interest rate).

Bottom line? I'd expect rates to increase over the next 12 months.

So what's an aware boomer to do? First, get rid of any variable rate debt. Think credit cards, credit lines against your house or any other loan where they can increase the rates without your permission.

Pay them off if possible. If not, consider shifting loans to fixed instruments (like your home mortgage).

The key is to not be in a position where the interest payments on your loans can go up each month if rates rise.

On the flip side, protect your investments and retirement accounts. Loaning money for long periods of time at today's rates is foolish. I was a financial planner in the 80's. Frequently I had people come in with corporate and municipal bonds that were paying a fraction of the high rates of the day. They were willing to sell the bonds until they found out that they were only worth about half of the face amount. The only way to get the full value out was to wait until they matured, a decade or more in the future.

What happened? They committed to loaning money at 5 or 6% for 20 or 30 years. New bonds were offering 2 or 3 times that interest rate. So no one would buy their bonds unless they were deeply discounted.

Now is the time to check your investments and retirement accounts to make sure you're not in a position to fall into the same trap. Sure, if you can get an extra percent on a 3 year over a 12 month CD you should take it. But, don't commit to long time frames at today's rates.

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And, if you have long-term bonds consider getting rid of them. That goes for the zero coupon bonds that will mature later on. They're often found in retirement accounts as 'target 202x' or 'target 203x' bonds or funds. Talk with your broker or financial planner if you're unsure what you own.

Boomers have an advantage. We've lived through both very high and very low interest rates. We've seen enough to know that current rates won't last forever. And, hopefully, we're smart enough to be prepared when rates start to rise.

updated April, 2017

Gary Foreman

Gary Foreman is a former financial planner and purchasing manager who founded The Dollar Stretcher.com website and newsletters in 1996. He's the author of How to Conquer Debt No Matter How Much You Have and he's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, Credit.com and CreditCards.com. Gary shares his philosophy of money here. Gary is available for audio, video or print interviews. For more info see his media page.

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