Column: For U.S. retirees, rising interest rates a double-edged sword

From Reuters - January 4, 2018

CHICAGO (Reuters) - U.S. interest rates finally are on the rise after a decade stuck near zero - and that should be good news for retirees who need yield on safe investments like certificates of deposit and money market accounts.

But higher rates will not be welcome news for all retirees.

Americans are more likely than ever before to enter retirement carrying debt, which leaves them vulnerable to rising interest rates. A recent study coauthored by Olivia S. Mitchell, executive director of the Pension Research Council at the Wharton School of the University of Pennsylvania, finds that growing debt obligations of older households leave them vulnerable to rising rates - and that an increasing share of their incomes will need to go to servicing debt.

No doubt, the yields available on savings are showing signs of life after a decade when ultra-low interest rates were a key tool used to stimulate the economy following the Great Recession.

The Federal Reserve raised short-term interest rates three times last year - most recently in December - and most economists expect several more rate hikes in 2018. Consumer yields on certificates of deposit and money market funds will rise, although not as quickly as loan rates. Still, rate shoppers interested in a one-year CD this week can find deals ranging from 1.65 percent to 1.80 percent, according to Three-year deals can be had around 2 percent.

Mitchells study is based on data from the University of Michigan Health and Retirement Study. ( She found that the rise of home prices over the past two decades, and the growth of easier mortgage products are key factors driving increasing debt burdens among older households.

Real estate has played a very important role in this, she said. More expensive houses are a very large factor in the rise of debt. Were also seeing people with larger mortgages on the larger houses - the old rules of putting down a certain down payment have changed.

Conventional wisdom holds that retirees should shed as much debt as possible - of any kind. But all debt is not equal, and some debt is relatively safe and can improve your liquidity - for example, a low-rate fixed mortgage that represents a relatively small portion of a homes value and that could be paid off if necessary.

But in the emerging rising-rate environment, a key question is how much debt being carried by older households carries variable rates, leaving borrowers exposed to substantial jumps in rates?


Mitchells research suggests that 20 percent of all U.S. consumer debt is variable. The most worrisome figure: 40 percent of households aged 62 to 66 reported carrying credit card debt in 2015. That was down slightly from 2012, when 43 percent of this age group carried credit card debt, but still quite high. Carrying balances on cards is especially dangerous; as the balance grows, interest rates get higher, and credit ultimately is cut off.


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