The Federal Reserve’s announcement on Sept. 15 stated that it will hold interest rates steady for the remainder of the year and so forth until further notice.
In addition, a U.S. interest rate hike could potentially occur by the end of the year. This recent news is great for Baby Boomers, but troubling for their Millennial children, making them poorer than before and beating out historical figures from the Great Depression and the Housing Crisis in 2008 and 2009.
The Fed’s interest rate policy over the past few decades that has been focused on stoking economic growth.
The policy has not been easy on savers heading into retirement, especially for whose earning years are primarily in the past.
Historically, lower interest rates have made safe investments with fairly decent returns harder to find and pushed more Baby Boomers into riskier assets. Yet, the higher the risk, the higher the return.
According to a 2015 Fidelity study, more than one-third of Americans between ages 51 and 69 were overexposed to stocks and 10 percent of them had all their 401K savings invested in stocks.
The returns on safe investments, like bonds and annuities, have plummeted in recent years, since those assets have been typically more expensive when yields are low.
In 1996, roughly $1 million in savings in a 20-year fixed nominal annuity or pension would have bought about $83,000 a year in income.
In July 2016, that same annuity would have cost roughly $1.47 million, according to Fidelity.
Here is a summarized recap: baby boomers are potentially going to seeing higher interest rates in the coming years.
Rising interest rates will be beneficial to retirees because they will boost returns on popular safe investments such as CDs and money market accounts.
On the other hand, the Millennial generation may be facing some troubling times because of the constant and higher interest rates imposed for the year(s) to come.
The Fed’s interest rate increase will mean higher interest rates on auto and mortgage loans. Additionally, the federal student loan rates will also increase dramatically once the hike takes place.
People who typically plan on taking on any amount of debt are students who are attending university classes and beginning the planning process for their savings years ahead.
If the interest hike occurs by the December 2016, these students will be scrambling to lock in those loans within the next three months to reduce the high risk they could potentially be in. This can be avoided as long as the Millennials’ spending habits hold consistent.
A vast majority of young adults and teenagers in the U.S. have been living in a low-interest rate bubble for most of their lives.
The idea of possibly living with higher interest rates may be completely ignored and may not have a dramatic effect on them by the end of the year.