How to Prepare Your 401(k) for Rising Rates

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News of rising interest rates might have investors concerned about their retirement plans. Here are some ways to potentially prepare your 401(k) in a rising rate environment.

By now, even the most remote tribes of the Amazon must be aware that interest rates in the U.S. may rise as a result of Federal Reserve activity. They’re lucky, because Fed activity shouldn’t have much of an impact on their lives. But for you and me, the people saving mainly through our 401(k) accounts? Reading the press closer to home may have you convinced that the (bond) sky is falling.

If these headlines have you worried, here are some ideas to help you think about your retirement-investing strategy going forward:

Five Ways to Think About Your 401(k) 

  1. First, don’t panic when you hear news of rates going up. Yes, you will read about some hedge fund manager making (or losing) millions from interest-rate speculation, but you are not a hedge fund manager. For most of us, the rational course of action is not to react. At least short term. Better to be slow and thoughtful than quick and possibly reckless.
  2. Yes, rising interest rates mean that bond prices may fall, but that doesn’t mean the bond fund in your workplace savings plan is going to tank. As interest rates rise, prices of longer-term bonds can fall. But fixed income funds in 401(k) plans typically have a diversified mix of securities, so their sensitivity to interest rates can vary tremendously. That’s the beauty of diversification. Also, remember that interest rates’ rising may be good news in the long-term, as higher rates should eventually produce higher yields from diversified bond funds.
  3. Speaking of diversification, it’s probably a good time to refresh your understanding of your investments. Check to see that your fixed income holdings are diversified and you are happy with their management style. You may prefer to basically follow an index, but if you have other options available in your plan, it’s worth considering diversifying with a fund that is actively managed, or has a series of underlying fund managers all within one fund. Knowing that your portfolio is diversified, along with a professional’s regular review of how the fund is performing, should allow you to sleep easier at night.
  4. If all this talk of interest rates and bond prices has your head spinning, you may be pleased to hear that most workplace savings plans offer an easy alternative to monitoring the markets—and trying to zig and zag through market turbulence. Target date funds are professionally managed balanced funds where all the asset allocation decisions are made for you. Instead of having to decide what to do about interest rates, you could let the fund’s manager worry about that for you. Target date funds are based on the number of years left before you retire, so they will typically allocate less money to bonds when you’re younger, and more money to bonds as you approach retirement.
  5. One other point: If you are retired and trying to maximize your income, rising interest rates may actually be good news. Take the time to visit with your financial advisor to make sure your portfolio is properly diversified, and that you are maximizing income for the years ahead.




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