How long will this high rate continue?

SAS Financial Advisors, LLC |

Cash in money market accounts is yielding 5% or better.  FDIC online savings accounts earn around 4.3%. Purchasing 1 year US Treasuries provides a yield of better than 5% and is state tax free.  How long will this high rate continue?  Of course, no one knows, and predictions have ranged from up to 5 rate cuts in 2024 to more recently, no rate cuts in 2024.  Predicting interest rates is no more accurate than predicting the performance of the stock market.

Right now, with interest rates available to investors exceeding the inflation rate is very tempting.  It is easy to forget the recent performance of the stock market or a diversified portfolio or 50% stocks 50% fixed income.  One year performance of a 50/50 portfolio is somewhere between 8 and 9%, better than the 5% performance of bonds. Of course, there was 2022 during which even historically low risk assets such as US Treasury bonds, fell in market value by up to 20%. There was nowhere to hide except short term US Treasury bills. Since that time, stock market averages have set new highs across the board. It was challenging to purchase stocks in 2022 because it felt like catching a knife. What made the challenge even greater was and is the “risk free” rate of return of US Treasuries. Those portfolios most vulnerable to asset value declines are those investors at the beginning of retirement. This is called “sequence of risk”. Imagine an investor planning on 4% withdrawals from a portfolio of $1M which would be $40,000 the first year. The portfolio declines by 10% to $900,000.  4% of that amount results in a decline in distributions to $36,000. Not huge but a definite impact on lifestyle choices.  Doable but not fun.  

In making decisions about retirement spending and investment returns a very important variable is the client's ability to control spending if they experience some adverse event like a market decline.  Of all the variables leading to success in a financial plan, is the client's ability to control spending.  Our experience is that clients can make the adjustment necessary.  Fortunately, overall market performance works in our clients favor over time.  



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