You might have seen news about falling interest rates, but what does it mean for you and your retirement? That’s not always so clear, and it’s partly because interest rates affect so many different aspects of our financial lives.

That said, the core issues for many retirees are bonds and debt – many of us have both. Here’s a quick look at what falling interest rates can mean for your retirement income plan, and what you can do to mitigate the risks.

1. As rates fall, bond yields fall

Falling rates can bring challenging news for bond investors: lower interest rates tend to mean lower payouts on fixed income securities. For those who rely on their bond portfolios for income, this can be concerning.

You may have heard market pundits talk about the “search for yield,” and for retirees finding appropriate sources of yield can be a critical question: how can you generate more income from your savings without causing your risks to skyrocket?

There are different ways of approaching the issue, which might include rethinking your asset allocation, turning to other financial products, or finding alternative income sources. We recommend having a discussion with your financial advisor to find the right mix of strategies for your personal situation.

2. As rates fall, bond prices rise

Generally speaking, the way bonds work is like this: when interest rates rise, bond prices fall. When interest rates fall, bond prices rise. So in a falling rate environment, you’ll likely see the value of your bonds go up.

This happens because the yield generated by a bond already on the market needs to “match” the yield offered by new bonds, assuming everything else is equal.

Here’s how it works: “Yield” is just a fancy way of describing what you get back relative to what you paid – so if you buy a bond from a company for $100 and it pays a 3% coupon for some period of time before giving back your $100, you’re getting a 3% yield.

But say market interest rates fall and equivalent new bonds start paying $2 instead of $3. If you sell your bond, the market will value that $3 income so the price of your bond will go up. This is a very simplistic explanation of what happens in bond markets, but the idea is that the prices of bonds will adjust based on the difference between a bond’s coupon payment and the market yield.

3. Debt can get cheaper

Moving away from investment portfolios, falling interest rates can have one very significant implication for retirees with debt: your debt can get cheaper.

This can be especially good news if you have good credit and the ability to refinance – just make sure that you take steps that are good for your overall financial security, not just for your payments. One study found that 40% of households between ages 62 and 68 had credit card debt in 2015, and researchers have voiced concern that high debt levels could erode the resilience of retiree finances.

Prudently taking advantage of falling rates can help you mitigate that risk and help set you up for a more robust financial future, but only if it’s done strategically. Be sure to talk to your advisor ahead of time.

Further Reading

Rising rates and portfolio withdrawal: https://corporate.morningstar.com/US/documents/targetmaturity/LowBondYieldsWithdrawalRates.pdf

Rising interest rates and debt: https://www.reuters.com/article/us-column-miller-rates/column-for-u-s-retirees-rising-interest-rates-a-double-edged-sword-idUSKBN1ET1AK and https://www.aging.senate.gov/imo/media/doc/01_Mitchell_9_25_13.pdf