There may be better savings yields, but beware rising credit-card rates

Nearly half of Americans aged 50 and older carry credit-card debt from month to month, including debt on active cards or cancelled cards, according to AARP.

Retirees may benefit from this week's expected interest-rate hike by earning more money on cash kept in CDs, high-yield savings accounts or money-market funds. Still, those gains may be offset by higher interest rates on credit cards and overall higher costs of living.

"Higher rates are a rare win for anyone living off savings instead of a paycheck," said Jeff Judge, a financial adviser and managing partner with Chesapeake Financial Planners. "The same rate hike that helps a CD also punishes anyone carrying a credit-card balance."

The Federal Reserve is expected to raise interest rates on Wednesday in the wake of the recent surge in oil prices, a strong jobs report and persistent inflation. While some economists predict a series of rate hikes, any increase would be the first from the Fed since 2023, and the first under Kevin Warsh's tenure as chairman.

With potentially higher interest rates "there are real positives here. Retirees who've built up cash reserves finally get paid something for holding safe assets. CDs, money markets and high-yield savings accounts all move up with the Fed, and for someone living off a fixed income, that extra yield on a CD ladder is real, spendable money," Judge said.

Another benefit for older adults: Buying an annuity when rates are high can provide a larger regular payout, advisers said.

While higher expected interest rates have some benefits for older adults holding cash, there are some instances when they can hurt seniors, especially those with debt. Nearly half of Americans aged 50 and older carry over credit-card debt from month to month, including debt on active cards or cancelled cards, according to AARP.

"Credit-card debt gets more expensive fast, since most cards carry variable rates tied directly to the prime rate. And seniors carry credit-card debt more often than people assume, sometimes to cover a medical bill or a grandkid's tuition gap," Judge said. "If they're only making minimum payments, a rate increase can turn a manageable balance into a much bigger problem within a year."

The simplest way to think about higher interest rates is that they generally help seniors who are net savers and hurt those who are net borrowers, said Jon Lapp, a financial adviser and founder of Haven Financial Advisors.

"To benefit from higher rates, seniors should first make sure idle cash is actually earning a competitive return. Many traditional savings accounts continue to pay far less than online savings accounts, CDs or Treasurys. A CD or Treasury ladder can spread maturities over time, preserve regular access to money, and reduce the risk of locking everything up at one rate," Lapp said.

Keep near-term spending money liquid, match bond maturities to expected expenses and avoid making bets about where rates will go next, Lapp said.

Rising rates make HELOCs (home equity lines of credit) and adjustable-rate mortgages "unpredictable at exactly the point in life when predictability matters most," Judge said.

"Don't lock long-term CDs the moment rates rise, thinking you've caught the top. And don't ignore a credit-card balance because 'it's just the minimum.' The math on variable-rate debt moves against seniors faster than most people expect." Judge said.

Overall, "higher interest rates can be a mixed bag for seniors," said Kashif Ahmed, founder and president of American Private Wealth.

"Higher rates ... make borrowing more expensive, especially credit-card debt and variable-rate loans. And seniors shouldn't assume that all bonds are unaffected - when rates rise, existing bond prices generally fall," Ahmed said.

"The biggest thing to avoid is making a dramatic change to a retirement portfolio simply because rates have moved. The right strategy is still one that balances income, liquidity, inflation protection and long-term growth," Ahmed said.

For those on fixed incomes or rigid budgets, like many retirees, "inflation can be especially dangerous," said Randy Bruns, a financial adviser and founder of Model Wealth Inc. "Workers have some inherent inflation protection through their 'human capital,' as wages tend to adjust upward over time. Retirees living primarily off financial capital don't have that same natural hedge."

That is one reason Social Security is incredibly valuable to retirees, Bruns said.

"Every dollar of guaranteed income reduces the amount retirees must draw from their investment portfolios, improving the sustainability of their retirement plan. When that income is also inflation-protected, as Social Security is, its value is even greater. For many Americans, Social Security may be the most valuable component of their retirement cash flow," he said.

Social Security's cost-of-living adjustment for 2027 could rise about $71 a month, analysts said after the August consumer-price index was released last week. A higher COLA reflects an increase to help beneficiaries keep pace with inflation.

Social Security, however, faces insolvency in 2032, at which time benefits will be automatically cut by 22% unless Congress acts to shore up the system.

"Retirees may be earning more on money markets, CDs and Treasury bills, but those higher rates are likely being offset by higher inflation. In many cases, their returns are simply moving in lockstep with their rising cost of living," Bruns said.

-Jessica Hall