There are financial, emotional, and personal questions you should ask yourself before you retire early.
That way you have a road map to meet your goals.
It’s a new year, and new changes are on the horizon. Just weeks away from a Presidential Inauguration, all eyes are on the President-elect. What will it mean for our economy and investments? Nobody can answer that yet, but we do know there is economic confidence going into 2017. The Federal Reserve recently raised interest rates for the second time in a year, and longer term rates are up as well. The rise in rates could affect your financial plan going forward.
Interest rates and your home mortgage
When most homeowners hear interest rates are rising, they immediately think of their mortgage rate. Your home is typically your biggest financial liability until you pay off your mortgage.
Homeowners with variable interest rates have benefited these last few years with lower payments. As rates go up, these variable-term loans may fluctuate rapidly, raising your monthly mortgage payment. Consider refinancing to lock in a low fixed rate if you have a variable loan.
Refinancing is something to consider even if you have a fixed-rate mortgage. Time may be running out to grab some of the lowest rates we’ve seen.
Is it worth it to refinance your home?
How much will you save each month by refinancing, and how long will it take to earn back the refinancing fees? Check out Bankrate’s mortgage refinance break-even calculator.
Refinancing costs money, but if you can make back the fees within a few years, depending on the monthly savings from the lower rate, refinancing may make sense. Bankrate has a mortgage refinance break-even calculator to help you figure out how long it will take to make back the refinancing costs. Remember, your mortgage is a long-term investment so even if it takes 2 or 3 years to re-coup the refinancing fees, you’ll save in the long term.
Bond prices down
When it became clear Donald Trump would be our next President, the markets reacted. On Election night, global markets panicked, plummeting Dow futures more than 800 points at one point. The next day, the market quickly recovered and performed well. These highs and lows we saw on Election night might be an indication of how 2017 will feel. Hold onto your seats. The road may be bumpy.
It’s a reminder to pay more attention to the long-term outlook than the short-term uncertainty. While it’s still unclear how Trump’s promised tax cuts and job growth will impact the economy, bond investors are reacting. They anticipate fewer regulations and more jobs will create economic growth and higher inflation. Neither is favorable to most bond investors.
If you’re holding onto cash waiting to invest in bonds, 2017 may be the time because rates are higher and prices are lower. Bond rates and prices move in opposite directions. It could make sense to use a barbell strategy. This means balancing longer term, higher-yielding bonds with less volatile, shorter-term bonds. This positions you to take advantage of higher rates while preserving your ability to move from shorter-term to long-term bonds if rates continue to rise. The barbell strategy is a middle-of-the-road approach that allows you to remain diversified and be half right rather than risking being all wrong if rates move in a direction other than you thought.
Another strategy is to dollar cost average into the bond market. In other words, don’t invest all your cash now, but invest it over time. Here’s one example of how it could work. Divide the amount to invest by four, and invest that amount into the bond market now. Then, every 3 months until you are fully invested. If you want to be more aggressive, you would invest over a shorter time frame. To be more conservative invest over a longer time frame.
Savings accounts could earn more
It’s always a good idea to keep some money in a savings account for both planned and unexpected expenses. Saving will start paying off in more ways than one as cash gets more valuable. Savings accounts earned very little in recent years. Even high-interest savings accounts are not high earners anymore. We will start to see that change directions if interest rates continue to move up. That means your savings account will earn more money. That makes cash more valuable.
Look at 401(k) & other investments
Look at your 401(k) and other investment accounts. Is it time to rebalance with the stock market up and bond prices down? It likely depends on how far away from your target allocation you are plus your risk tolerance. If you are more conservative, it could make sense to rebalance back to your target if you are 5% from your target. If you are more aggressive, it could be a good idea to rebalance if you are 10% or more from your target.
With the recent moves in interest rates and the Dow near 20,000, it is very likely we will continue to see volatility in both the bond and stock markets. Just remember, nothing lasts forever in the markets, so remain diversified, adjust your financial plan as necessary, and focus on the long term.