You’ve heard the news and you’ve read the alarmist headlines—interest rates are up to combat inflation, and the Fed plans to continue rising rates until inflation is tamed. After years of rates hovering near zero, a rising rate environment is unfamiliar territory for many. But that shouldn’t be cause for alarm. In fact, it could be cause for celebration, especially for wealthy investors who have the resources to take advantage of these conditions to alleviate the impact of volatility on their long-term returns. Remember, we want higher yields, however the path to get there is always one with a great deal of turbulence.
Wealthy people do not typically have variable interest debt, rent a home or have student loans. As such, a rising rate environment can be your best friend. You see, what a rising rate environment does is allow you to take advantage of purchasing income producing investments earning higher interest rates than they have been during the low-rate environment. When interest rates rise, bonds are issued at higher rates. When you can secure these investments at higher rates, you put far less strain on your nest egg to provide the income you need in retirement. In other words, your ‘safe withdrawal rate’ improves!
For example, let’s say you were planning to withdraw $300,000 from your portfolio each year ($25,000 per month) in retirement. Using the standard, ‘4% safe withdrawal rate’, you’d need $7.5 million in your account to produce this income without ever dipping into your principal. But, with interest rates driving up yield returns on income producing investments (the ones you’ll be building your retirement income from), the potential exists to increase your withdrawal rate to 6% requiring only $5 million in your portfolio. In essence, what rising rates have done is allow your ‘safe withdrawal rate’ to go up while significantly reducing the size of the nest egg required to produce your income. This is a wonderful pot of gold at the end of this storm’s rainbow.
Yes, the first half of 2022 has seen stock and bond markets react very negatively to this rising rate climate, but we remain very confident new highs will be reached again! This time though, the end result will be with higher yields in place. This unpleasant and bumpy path to get to this point is temporary. It will end up being a net positive over time.
The fact of the matter is that the volatility, while temporary, will likely leave rates higher for some time. What does this mean for us? That even when things settle out, we will still be able to benefit from the increased interest rates with a little less stress from the equity side of the coin. We will see higher yields from bond investments for the foreseeable future—allowing you to withdraw more with less demand on your portfolio. Even if you don’t decide to withdraw more, you will at least know your ‘safe withdrawal rate’ requires a much smaller principal behind it to produce the desired income. In the example above, a 2% rate change decreases your principal need by 2.5 million dollars! This is much more money that can be transferred to heirs, donated to charity or used for travel and leisure!
As you can see, this rising rate environment is a win-win for people with wealth. You just have to remain very disciplined. As you know, locking in losses with the sale of equities when the market is down is one of the most surefire ways to permanently injure your wealth. So, you must resist the urge to follow the herd off the emotional cliff and sell your way out of this silver lining that is your future.
President & Founder