Sandy C. from Rochester, NY asks: Hi Mitch, with the big interest rate cut last week, I’m curious if there are any finance moves that I should be making with my savings. I’m retired so I don’t want to take any risk with my cash holdings, but I also don’t want to end up earning no interest. Your thoughts are appreciated!
Mitch’s Response:
Thanks for writing. That’s a great question you’re asking. First, for context, the Federal Reserve opted to lower the benchmark Fed funds rate by 50 basis points, to a range of 4.75% and 5%. The larger cut was near unanimous, with 11 of the 12 Fed officials voting in favor. We also learned from released projections that the Fed could cut by an additional 25 basis points at each of the next two meetings, scheduled for November and December. If they follow through on these projections, we could see the Fed funds rate drop to a range of 4.25% to 4.5% by the end of the year.1
These rate cuts are indeed likely to filter through to yields on checking and savings accounts – and fairly soon.
Revising Your Retirement Portfolio After Rate Cuts
Market changes, like interest rate adjustments, can affect your financial strategy. I recommend a well-structured retirement plan that helps navigate these shifts and stay on track toward your goals.
So, I’ve created a special guide, 7 Secrets to Building the Ultimate Retirement Portfolio2, to help investors create a retirement investment plan that can withstand any market. It contains key retirement planning details including:
- Accurately forecasting your retirement income needs
- The two phases of determining your asset allocation
- Developing an investment discipline that allows you to get good results over time
- Avoiding self-sabotage—what you need to know
If you have $500,000+ to invest, get our free 7 Secrets to Building the Ultimate DIY Retirement Portfolio2 guide today.
There is data available to help us understand the potential magnitude of the effect. According to a 2021 paper in the Journal of Finance, an average of 30% to 40% of the change in the benchmark Fed funds rate gets reflected in yields on deposit accounts. We also know that banks tend to be more eager to lower deposit rates than to raise them, perhaps for obvious reasons. Looking at a period from 1997 to 2011, Fed research found that banks tended to lower deposit rates about three weeks after cuts.
The most recent example we can review from history was from March 2020, when the Fed lowered rates in response to the pandemic. The average yield on 1-year CDs fell within weeks, and the chart below also shows 3-month CDs rapidly declining in that period.
Yield on 3-Month CDs, 2014 – Present
Readers may also notice that yields on 3-month CDs appear to have already peaked and look poised to come down slightly. With rate cuts now official, and potentially more to come, I don’t envision this adjustment taking too long.
Does this mean savers need to rush out and buy CDs to lock in higher relative rates? That’s a question best answered on a case-by-case basis, in my view, and it depends on the level of liquidity one needs and how much emergency cash savings are available for deposit accounts. It does not hurt to shop for yields, however, just make sure it’s with a reputable financial institution or in a short-term risk-free instrument, like short-duration U.S. Treasury bonds.
For more expert tips on managing your retirement portfolio, check out our guide, 7 Secrets to Building the Ultimate DIY Retirement Portfolio4. This resource provides essential tools and strategies to help you build a portfolio tailored to your retirement goals.:
- Accurately forecasting your retirement income needs
- The two phases of determining your asset allocation
- Developing an investment discipline that allows you to get good results over time
- Avoiding self-sabotage—what you need to know
If you have $500,000 or more to invest, get this guide to learn our ideas on the step-by-step process of building and maintaining a retirement portfolio that will potentially help you reach your goals and enjoy a secure retirement.
Disclosure
2 ZIM may amend or rescind the guide “How to Build Your Ultimate Retirement Portfolio” for any reason and at ZIM’s discretion.
3 Fred Economic Data. January 12, 2024. https://fred.stlouisfed.org/series/IR3TCD01USM156N#
4 ZIM may amend or rescind the guide “How to Build Your Ultimate Retirement Portfolio” for any reason and at ZIM’s discretion.
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