Should the Fed’s rate cut change your retirement savings strategy?

The Federal Reserve has had an inflation problem to deal with in 2022 and 2023 and has raised interest rates several times to tame it. Since the beginning of 2024, inflation has moderated. And in August, annual inflation was measured at 2.5 percent, according to the consumer price index. That’s not that far from the Fed’s preferred 2% target.

In light of this, the Fed cut its benchmark interest rate on September 18 by half a percentage point. And it’s a move consumers will likely celebrate in the weeks and months ahead.

Image source: Getty Images.

Lower interest rates tend to ease pressure on borrowers, because while the Fed doesn’t set rates for mortgages or auto or home loans, its monetary policies influence the cost of these products to consumers. With the Fed’s benchmark interest rate falling, borrowing should become less expensive.

You may be wondering if the Fed’s interest rate cuts should affect your approach to retirement savings. But there’s a pretty clear answer to that question — no.

Why Fed tapering shouldn’t matter to your retirement portfolio

In light of the Fed’s interest rate cuts, savings accounts and CDs may seem less attractive. So you may want to move some of your cash into the short term by, for example, moving extra savings into a brokerage account instead of keeping it in the bank as rates fall.

But the Fed’s recent interest rate cut and any future interest rate cuts coming in the next year shouldn’t impact your retirement savings strategy. Simply put, if you are many years away from retirement, you should put most of your savings into the stock market.

You need stocks to fuel your portfolio growth. And investing most of your retirement account in CDs is not a good idea even during times when rates are higher, which was the case in 2024.

And if you’re worried that the Fed’s interest rate cuts will have a negative impact on stocks, you know this. Just as lower interest rates make it easier for consumers to borrow money, they also make it easier for businesses to borrow. This allows companies to expand, leading to potentially higher share prices.

In addition, lower interest rates tend to fuel consumer spending. When rates are lower, savings accounts and CDs become less attractive, so consumers are typically less motivated to park their cash and less willing to spend it. It could also be a good thing for stocks.

But regardless of rate cuts or consumer spending patterns over the next year or so, you should recognize that stocks are the best option as a long-term retirement investment. So in the context of your 401(k) or IRA, it almost shouldn’t matter what the Fed does if you’re not nearing retirement age.

Keep thinking long term

Just as a stock market downturn shouldn’t shake you up too much as an investor if you’re saving for a retirement that’s years away, the Fed’s decision shouldn’t change your approach to building your nest egg either. . Stocks have long been considered the gold standard in the context of retirement savings. And there’s no reason to think anything should change just because the Fed is finally taking action on interest rates.

Of course, you may decide to take advantage of lower interest rates next year by refinancing your mortgage or other loan, freeing up more money to put toward retirement savings. It’s definitely not a bad idea at all. But beyond that, the Fed’s actions shouldn’t change your approach to saving for the future.