Sales of annuities, a financial product that can provide a lifetime income stream in retirement, are smashing records as Americans look to lock in high interest rates.
Sales of one type of annuity in particular, fixed-rate deferred annuities, have more than tripled in the last two years, rising to $164.9 billion in 2023 up from just over $50 billion in both 2020 and 2021, according to trade association LIMRA.
With annuities, you pay a lump sum to an insurance company to receive monthly payments for life that begin on an agreed upon date, which Americans commonly align with their retirement. Annuities with deferment periods are popular for people in their 50s or 60s who want a product that will grow tax-deferred before they convert it to a steady income stream.
Fixed-rate deferred annuities are the “most basic product” out of the many different types of annuities because they grow at a guaranteed annual rate, says Chris Blunt, CEO of F&G, an annuity provider that is a subsidiary of Fidelity. His company has seen 46% growth in the space in the past year, thanks in part to more attractive rates.
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In 2022, rates were in the arena of 2.5%, Blunt says. But last year, they soared and now sit around 4% to 5%.
Fixed-rate deferred annuities are behaving similarly to certificates of deposit (CDs), which also provide guaranteed returns at rates that typically move in tandem with the Federal Reserve’s rate decisions.
With inflation cooling and the Fed possibly gearing up for rate cuts in 2024, people are seizing on what could be the last chance to get a rate in the ballpark of 5%.
Unlike CDs, however, annuities are not insured by the Federal Deposit Insurance Corp. (FDIC), and there are typically higher fees as well as a 10% early withdrawal penalty for distributions before age 59 ½. These are clear tradeoffs, but in exchange, you can usually get a better rate with an annuity than a CD.
Annuity sales broke records in 2023
Bryan Hodgens, head of research at LIMRA, says the first jump in annuity sales occurred in late 2022 and early 2023 as interest rates were rising amid high inflation.
“When you had these pretty dramatic increases in interest rates, consumers could now get much higher rates on these fixed annuities,” he says.
Rates have increased in large part because annuity companies invest your dollars in bonds and other securities, which are generating higher returns. Annuity companies were faster to react to the changes in market conditions and adjust their rates compared to banks offering similar products, according to Eric Henderson, president of Nationwide Annuity.
“As the Fed raised rates, banks tended to be slow to raise their CD rates where the insurance industry, the annuity industry moved more quickly, so I think that’s what really caused the surge at first,” Henderson says.
He adds that this was around the time when recession fears were peaking, which meant there was high demand for safe places to stash money that offered returns without the risk of the stock market. Of course, a recession hasn’t materialized and “you would have been better off actually investing in the market, but you didn’t know that at the time,” Henderson says.
Hodgens says the fourth quarter of 2023 marked a second big spike in annuity sales. Sales have boomed again more recently because the Fed is indicating that rate cuts are on the horizon, which is spurring people to buy while current annuity rates are still available.
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Higher rates create opportunities for retirement savers
It’s not just fixed-rate deferred annuities that are hot, Hodgens says, noting that fixed indexed annuities and registered index-linked annuities (RILAs) are also selling at record levels. Like fixed-rate deferred annuities, these products are common tools for retirement planning and they’re more attractive in a high-interest rate environment.
With fixed indexed annuities, you don’t have a constant rate of return like with the fixed-rate variety. Instead, they’re tied to indexes like the S&P 500, but your principal investment is guaranteed, meaning you can’t lose any money. In exchange, the upside — or how much you can earn — is capped.
RILAs are almost exactly the same except instead of not being able to lose money, the insurance company commits to absorbing the first 5% or 10% of loss in the event the index declines in a year, Butler says. There’s still a cap on the upside, but it’s not as large.
Annuities aren’t the right retirement planning tool for everyone: Some have high fees, and alternative retirement savings options may offer greater flexibility or the potential for higher returns. But they can be appealing to people who want a lifetime income stream. One strategy is to combine annuities with Social Security so you can ensure a level of comfort — or at least income — in retirement.
While there’s been plenty of talk around the pain for consumers that comes with high interest rates, annuities are a good example of how there’s also been the emergence of some unique opportunities in fixed income to set yourself up for the future, Hodgens says.
“Most Americans loved their pension plan, it’s just most of us don’t have a pension plan anymore,” Blunt says. Annuities, though, can provide a similar peace of mind that you won’t outlive your savings.
“That can be game-changing in an overall financial plan,” he says. “It gives people more courage to be a little more aggressive on the rest of their savings.”
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Investing in mutual funds has become a cornerstone strategy for those looking to grow their wealth over time. With a mutual fund, you’re essentially pooling your money with other investors to buy a large portfolio of stocks, bonds, or other securities. This collective investment approach allows individuals to participate in a diversified range of assets, which might be difficult to achieve on their own.
What exactly is a mutual fund?
At its core, a mutual fund gathers money from many investors to invest in various securities. These can include stocks, bonds, and other financial instruments. The beauty of mutual funds lies in their ability to offer immediate diversification, spreading out the risk across different investments.
When you buy a share of a mutual fund, you’re buying a piece of a large, varied portfolio. For example, a single mutual fund share could include small portions of companies like Apple, Microsoft, and Berkshire Hathaway.
How Mutual Funds Work
Mutual funds are a popular choice for investors looking to diversify their portfolios without the hassle of managing each investment individually. Let’s break down how these investment vehicles operate, focusing on the collective investment strategy, the pivotal role of mutual fund managers, the principle of diversification, and the critical concept of Net Asset Value (NAV).
Pooling Money for Diverse Investments
At its most basic, a mutual fund works by pooling money from multiple investors. This pool of funds is then used to buy a wide array of securities, including stocks, bonds, and other financial instruments. This collective buying power allows individual investors to access a broader range of investments than they might be able to afford or manage on their own.
The Crucial Role of Fund Managers
A mutual fund manager is a professional that is tasked with making the day-to-day decisions about where to invest the fund’s money. Their goal is to select securities that will help the fund achieve its investment objectives, whether that’s growth, income, or stability. Through their expertise, they strive to maximize returns for investors while adhering to the fund’s stated investment strategy.
Emphasizing Diversification and Risk Management
One of the key benefits of investing in mutual funds is diversification. By holding a wide variety of investments within a single fund, mutual fund investors can reduce the impact of poor performance from any single security. This strategy helps manage risk and can lead to more stable returns over time. Mutual funds make diversification easier and more accessible, particularly for investors with smaller amounts of capital.
Understanding Net Asset Value (NAV)
The net asset value (NAV) is a fundamental concept in the world of mutual funds, serving as a critical measure of a fund’s per-share market value.
The Definition and Importance of NAV
NAV represents the total value of all the securities held by the fund, minus any liabilities, divided by the number of shares outstanding. This figure is crucial because it determines the price at which shares of the mutual fund can be bought or sold at the end of the trading day. Investors pay close attention to NAV to assess the performance and value of their mutual fund investments.
Calculating NAV: A Closer Look
To calculate the NAV of a mutual fund, you subtract the fund’s liabilities from its assets and then divide this figure by the number of shares outstanding. This calculation is typically done at the end of each trading day to reflect the current market value of the fund’s holdings. By understanding NAV, mutual fund investors can make informed decisions about when to buy or sell shares of a mutual fund, ensuring they are aligned with their investment strategies and goals.
Types of Mutual Funds
Investors have a wide array of mutual fund types to choose from, each catering to different investment goals, risk tolerances, and time horizons. Understanding the nuances of these various funds can significantly aid in constructing a diversified and effective investment portfolio. Here’s a comprehensive look at some of the key types of mutual funds available:
Equity Funds (Stock Funds)
Equity funds, or stock funds, are mutual funds that invest primarily in stocks of publicly traded companies. They are categorized based on the market capitalization of the companies they invest in (small-cap, mid-cap, large-cap) or their investment strategy (growth, value, dividend income).
Equity funds aim to provide capital appreciation over the long term and can be either actively managed, where a fund manager picks stocks to try to outperform the market, or passively managed, mimicking the performance of a specific index.
Fixed-Income Funds (Bond Funds)
Fixed-income funds, often referred to as bond funds, invest in bonds and other debt securities that pay a fixed rate of return. These funds are designed to provide investors with steady income and are generally considered less risky than equity funds. They can invest in various types of bonds, including government bonds, municipal bonds, and corporate bonds, each offering different levels of risk and return.
Asset Allocation Funds
Asset allocation funds are designed to invest across different asset classes, including stocks, bonds, and sometimes alternative investments like real estate or commodities. These funds adjust their asset allocation based on the fund’s investment objectives and the current market conditions, aiming to balance risk and return. They can be a good choice for investors looking for a diversified investment in a single fund.
Index Funds
Index funds aim to replicate the performance of a specific market index, such as the S&P 500 or the Dow Jones Industrial Average, by investing in the securities that make up that index. These funds are known for their low expense ratios and passive management strategy, making them an attractive option for cost-conscious investors seeking market-matching returns.
Target Date Funds
Target date funds are a type of asset allocation fund that automatically adjusts its investment mix as the fund’s target date (usually retirement) approaches, shifting from more aggressive investments to more conservative ones. These funds are designed for investors who prefer a hands-off approach to managing their retirement savings.
Money Market Funds
Money market funds invest in short-term, high-quality debt securities, such as Treasury bills and commercial paper. They aim to provide investors with a safe place to invest easily accessible, liquid assets, offering a higher return than regular savings accounts, though with slightly higher risk.
Commodity Funds
Commodity funds invest in physical commodities, such as gold, oil, or agricultural products, or in commodity-linked derivative instruments. These funds can offer investors a hedge against inflation and a way to diversify their portfolios away from traditional stocks and bonds, though they can be more volatile.
Environmental, Social, and Governance (ESG) Funds
ESG funds select investments based on ethical, social, and environmental criteria, in addition to financial considerations. Investors who wish to align their investment choices with their personal values may find these funds appealing. ESG funds can invest across a range of industries and asset classes, excluding companies that do not meet specific ethical standards.
Setting Up a Mutual Fund Account
Embarking on your mutual fund investment journey begins with setting up an account. This process is straightforward, but there are a few key considerations to keep in mind to ensure you’re making informed decisions right from the start.
Here’s a step-by-step guide to getting your mutual fund account up and running, along with insights into selecting a broker and understanding the fees involved.
Step-by-Step Guide to Opening an Account
Determine your investment amount: Start by deciding how much money you’re ready to invest. Mutual funds often have minimum investment requirements, but these can vary widely from one fund to another.
Choose a broker or investment platform: Research brokers or investment platforms that offer access to the mutual funds you’re interested in. Look for platforms that align with your investment goals and budget.
Understand the fees: Before making your choice, thoroughly investigate the fees associated with buying, holding, and selling mutual funds on the platform. These can include management fees, transaction fees, and any other charges that could affect your investment’s growth.
Open your account: Once you’ve chosen a broker or platform, go ahead and open your account. This process typically involves providing some personal information and setting up a way to fund your account.
Start investing: With your account open, you’re ready to start buying shares of mutual funds. Consider starting with a diversified fund that aligns with your risk tolerance and investment goals.
Selecting a Broker and Understanding Fees
When choosing a broker or investment platform, consider not only the fees but also the services and support offered. Some investors prefer platforms with robust educational resources and customer service, while others might prioritize low fees or the availability of a wide range of funds. Understanding the fee structure is crucial because fees can significantly impact your investment returns over time.
Making Money and Managing Risks with Mutual Funds
Investing in mutual funds can be a profitable endeavor, but it’s important to understand how returns are generated and the risks involved. Here’s what you need to know about making money with mutual funds and managing the inherent risks of investing in the market.
How Investors Earn Returns
Mutual fund returns can come from several sources, including dividend payments from stocks within the fund, interest payments from bonds, and capital gains from selling securities at a higher price than they were purchased.
The fund’s performance, and consequently, your return as an investor, is influenced by the market performance of its underlying investments. As the value of the fund’s holdings increases, so does the value of your shares in the fund.
Understanding the Risks and Market Volatility
While mutual funds can offer a more diversified and thus potentially less risky investment than individual stocks, they are not immune to market volatility. The value of your investment can fluctuate based on overall market conditions, the performance of the securities within the fund, and economic factors. Diversification can help manage risk, but it cannot eliminate it entirely.
It’s vital to have a long-term perspective and recognize that market fluctuations are a normal part of investing. By staying informed about your investments and maintaining a diversified portfolio aligned with your risk tolerance and financial goals, you can navigate market volatility more effectively and work towards achieving your investment objectives.
Comparing Mutual Funds with ETFs
When expanding your investment portfolio, understanding the differences between mutual funds and exchange-traded funds (ETFs) is crucial. Both investment types offer unique advantages and come with distinct fee structures and management styles.
Differences Between Mutual Funds and ETFs
Mutual funds are investment vehicles that pool money from many investors to purchase a diversified portfolio of stocks, bonds, or other securities. They are typically managed by a professional fund manager and are bought or sold at the end of the trading day based on the fund’s net asset value (NAV).
ETFs, on the other hand, are similar in that they also pool investor money to buy securities, but they trade like stocks on an exchange. This means they can be bought and sold throughout the trading day at market prices that can fluctuate.
Fee Structures and Management Styles
Mutual funds often have higher expense ratios due to active management, where fund managers make decisions on which securities to buy or sell. ETFs tend to have lower fees, partly because many are passively managed, aiming to track the performance of a specific index rather than outperforming the market.
See also: What’s the Difference Between ETFs and Mutual Funds?
Benefits of Investing in Mutual Funds
Mutual funds offer several advantages that make them an attractive option for individual investors, including diversification, liquidity, and professional management.
Diversification
By investing in a mutual fund, you gain access to a broad array of securities in one transaction. This diversification can help reduce your investment risk by spreading it across various assets.
Liquidity
Mutual funds offer high liquidity, meaning you can buy or sell your shares of the fund at the end of each trading day at the NAV, making it easier to manage your investments.
Professional Management
Actively managed mutual funds benefit from the expertise of a fund manager who makes investment decisions aimed at achieving the fund’s objectives. This is particularly valuable for investors who do not have the time or experience to manage their investments.
Fund managers actively select and manage the investments within the fund to try to outperform the market, providing a potential advantage over passively managed funds.
Withdrawing Money from Mutual Funds
Withdrawing money from your mutual fund investments can have financial implications, especially when it comes to retirement accounts.
Penalties and Taxes on Withdrawals
If you withdraw from a mutual fund within a retirement account like an IRA or 401(k) before the age of 59 and a half, you may face early withdrawal penalties and income taxes on the amount withdrawn. For non-retirement accounts, selling shares of a mutual fund can trigger capital gains taxes if the investment has increased in value.
Starting Your Mutual Fund Investment
Beginning your journey with mutual funds involves a few key steps, including understanding the initial investment requirements and the importance of research.
Initial Investment Requirements
Mutual funds often have minimum investment requirements, which can vary significantly from one fund to another. It’s important to choose a fund that matches your financial situation and investment goals.
Importance of Research and Understanding Fund Performance
Before investing, thoroughly research potential mutual funds to understand their investment strategy, past performance, and fee structure. Reviewing historical returns can provide insight into how the fund performs in different market conditions, helping you make an informed decision.
Final Thoughts
Diving into mutual fund investments offers a promising path to wealth growth and achieving your financial aspirations. It’s crucial to engage in thorough research and choose mutual funds that best match your investment goals and risk appetite. Mutual funds are integral to a diverse investment strategy, providing the benefits of diversification, expert management, and liquidity.
Being well-informed is key to investment success. Take the initiative to explore the various mutual fund options, their past performances, fee structures, and their role in your overall investment portfolio. With careful selection and strategic planning, mutual funds can significantly contribute to a robust and prosperous financial future.
Frequently Asked Questions
What are the differences between actively and passively managed mutual funds?
Actively managed funds are managed by professionals who actively select investments to outperform the market, leading to higher fees. Passively managed funds, or index funds, aim to mirror the performance of a specific index, resulting in lower fees due to less frequent trading and lower operational costs.
How do mutual fund dividends work?
Mutual fund dividends come from the income generated by the fund’s investments. Shareholders can either receive these dividends as cash or reinvest them to buy more shares of the fund. The approach depends on the fund’s distribution policy and the investor’s preference.
Can I lose money in a mutual fund?
Yes, investing in mutual funds carries the risk of loss. The value of a mutual fund can decrease if the investments it holds lose value. Market volatility and economic changes can affect the fund’s performance, potentially leading to losses.
How do I choose the right mutual fund for me?
Choosing the right mutual fund involves considering your investment goals, risk tolerance, the fund’s performance history, fee structure, and the fund manager’s track record. It’s important to select a fund that aligns with your financial objectives and comfort with risk.
How often should I review my mutual fund investments?
Review your mutual fund investments at least annually or when your financial situation or goals change. This helps ensure your investments remain aligned with your objectives and allows you to make adjustments based on the fund’s performance and changes in the market.
What is the impact of taxes on mutual fund investments?
Taxes on mutual fund investments can affect your returns, especially for funds in non-retirement accounts. Dividends and capital gains distributions are taxable events. Selling shares at a profit also triggers capital gains taxes. Investing in tax-efficient funds or using tax-advantaged accounts can help minimize the tax impact.
When Caleb Pepperday and his wife secured a 2.75% mortgage rate on their home in Pittsburgh in 2021, the young couple couldn’t believe their luck. Buying when interest rates were at historically low levels in the U.S., the Pepperdays received one of the most enviable loans in home ownership.
Just two years later, the couple sold to move to Montana—losing the rate and becoming renters again in the process. “We thought we were going to stay in that house for a long time,” Pepperday, 27, tells Fortune. “But things change.”
While he and wife don’t regret the move one bit—they and their entire generation are wishing there was a way to turn back the clock to the glory days of low mortgage rates. Right now the 30-year fixed rate hovers around 7.7%, which is not historically high, as many members of older generations are quick to point out. But when coupled with the outrageous price of the median home, now standing at over $412,000, many would-be homebuyers feel locked out of the market. In fact, affordability hit a 38-year low in September.
Millennials were late to home ownership for myriad reasons, including higher student debt burdens, wedding later in life, and rapidly rising rents. When rates dropped, it felt like a once-in-a-lifetime opportunity for some to finally get into the market and buy their dream home. Now that rates have doubled, that dream is fading once again: One in five millennials now says they will never own a home, according to real estate brokerage Redfin.
But Pepperday, a certified financial planner (CFP), encourages his fellow millennials who believe they lost their last shot at home ownership to reframe their thinking.
“The mindset of, if you don’t buy now you’ll miss out forever, I don’t think that’s true,” he says. “Interest rates are simply out of your control, so fretting about them doesn’t really do you much good. It’s easy to second-guess yourself and say what could have been, but focus on what you can control.”
Here’s the advice he and other financial experts have for millennials who feel they missed out on a golden housing opportunity.
1. Take your time
There’s likely a good reason you didn’t buy when rates were low, even if you had the funds to do so, says Sean Williams, a Maryland-based CFP. You might not have known where you wanted to live, or you couldn’t find the right space, especially given the tight inventory.
Remember those reasons. It’s a mistake to compare yourself to others, rush into making one of the biggest financial decisions of your life, and potentially force something that could put you in a huge long-term financial bind, he says.
Don’t get caught up in the should-haves or would-haves and make a rash decision—do what makes sense for your household. If you need a cautionary tale, Fortune previously reported upwards of 40% of recent buyers regret their decision, but feel locked in due to their low mortgage rate. (And that low rate doesn’t preclude you from shelling out for a ton of other unexpected costs you wouldn’t have renting.)
“Patience isn’t fun, but it can yield great dividends,” Williams says. “Something greater could await you, and you’ll miss it if you keep looking back.”
2. Use this time to prepare
Those are set on buying shouldn’t be dissuaded by higher rates, Williams says. Though inventory is low, housing hopefuls can use this time to build their credit, scope out mortgage lenders, explore neighborhoods, and better understand what they want in a home and what they can afford.
“Take the time to understand the transaction,” Williams says. “It won’t be a waste of time if you’re incrementally bettering your position for when the time is right.”
And remember all that regret? While owners may not want to sell now, they won’t hold out forever if they aren’t happy in their home, no matter how low their interest rate, Williams says. That will open up more inventory, which buyers can snap up—if they’re prepared.
“Home values can move. And so can interest rates,” he says. “It’s sort of like investing in the market. You can look back and say, ‘Oh, I could have timed it.’ But it really makes sense to put yourself in the best financial position possible no matter the season.”
3. Look into alternatives
Though a 30-year mortgage is the most traditional option—and typically the headline figure—Dottie Herman, vice chair and former CEO of Douglas Elliman Real Estate, advises homebuyers to look into alternatives, such as five-year ARMs, which can offer lower introductory interest rates than conventional loans, or other forms of “creative financing.”
“I tell so many young people, it’s kind of a cliché that people use 30-year mortgages, because people don’t live in houses for 30 years anymore,” Herman says. “Go sit with your mortgage broker or banker and educate yourself on the different mortgages available.”
There are also grants and first-time homebuying programs that can make the process easier and more affordable. And Herman says to remember that you can always refinance in the future. If you find a home you like now that you can afford, it can still make sense to buy. You won’t get a sub-3% rate, but that doesn’t mean it’s not a worthwhile purchase. There will never be a perfect time.
Higher rates “would not stop me from buying a home. If you’re looking, you should not stop looking,” she says. “No one can time the market, so you just have to wait for a time that you can refinance.”
Finally, Pepperday says to consider whether home ownership is right for you at all, or if you just want to buy because it seems like the socially acceptable thing to do. Yes, it can help build wealth—but so can plenty of other financial moves, he says. Don’t put your life on hold for one financial choice.
“We are spending less on housing costs as a renter than when we owned,” Pepperday says. “Of course over time we’re not building any equity, but we have additional cash flow that we can use to put toward other investments that have more flexibility to get to the money than what a home has.”
The worst thing you can do, according to Pepperday, is stretch yourself to buy a home you can’t afford, just because you think it’s something you “should” do. “Don’t make yourself house-poor.”
There are two sides to inflation for consumers: The rising cost of goods and services means that the basic cost of living rises for most people. But the right amount of inflation can spur production and economic growth.
Deciding whether inflation is good or bad therefore depends on how various factors might play out in different economic sectors.
What Is Inflation?
Inflation is an economic trend in which prices for goods and services rise over time. The Federal Reserve uses different price indexes to track inflation and determine how to shape monetary policy.
Generally speaking, the Fed targets a 2% annual inflation rate as measured by pricing indexes, including the Consumer Price Index. Historically, though, the inflation rate has been about 3.3%.
Rising demand for goods and services can trigger inflation when there’s an imbalance in supply. This is known as demand-pull inflation.
Cost-push inflation occurs when the price of commodities rises, pushing up the price of goods or services that rely on those commodities.
Asking whether inflation is bad isn’t the right lens for this economic factor. Inflation can have both pros and cons for consumers and investors. Understanding the potential effects of inflation can maximize the positives while minimizing the negatives. 💡 Quick Tip: How do you decide if a certain trading platform or app is right for you? Ideally, the investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.
Is Inflation Good or Bad?
Answering the question of whether inflation is good or bad means understanding why inflation matters so much. The Federal Reserve takes an interest in inflation because it relates to broader economic and monetary policy.
Some level of inflation in an economy is normal, and an indication that the economy is continuing to grow. While inflation has remained relatively low over the past decade, it has historically seen the most change during or right after recessions.
The Fed believes that its 2% target inflation rate encourages price stability and maximum employment.
Recommended: 7 Factors That Cause Inflation
Broadly speaking, high inflation can make it difficult for households to afford basic necessities, such as food and shelter. When inflation is too low, that can lead to economic weakening. If inflation trends too low for an extended period of time, consumers may come to expect that to continue, which can create a cycle of low inflation rates.
That sounds good, as lower inflation means prices are not increasing over time for goods and services. So consumers may not struggle to afford the things they need to maintain their standard of living. But prolonged low inflation can impact interest rate policy.
The Federal Reserve uses interest rate cuts and hikes to keep the economy on an even keel. For example, if the economy is in danger of overheating because it’s growing too rapidly, or inflation is increasing too quickly, the Fed may raise rates to encourage a pullback in borrowing and spending.
Conversely, when the economy is in a downturn, the Fed may cut rates to try to promote spending and borrowing.
When both inflation and interest rates are low, that may not leave much room for further rate cuts in an economic crisis, which may spur higher employment rates. If prices for goods and services continue to decline, that could lead to a period of deflation or even a recession.
So, is inflation good or bad? The answer is that it can be a little of both. How deeply inflation affects consumers or investors — and who it affects most — depends on what’s behind rising prices, how long inflation lasts, and how the Fed manages interest rates.
What Is Core Inflation?
Core inflation measures the rising cost of goods and services in the economy, but excludes food and energy costs. Food and energy prices are notoriously volatile, even though demand for these staples tends to remain steady.
Both food and energy prices are partly driven by the price of commodities — which also tend to fluctuate, owing to speculation in the commodities markets. So the short-term price changes in these two markets make it difficult to include them in a long-term reading of inflationary trends: hence the core inflation metric.
The Consumer Price Index and the core personal consumption expenditures index (PCE) are the two main ways to measure underlying inflation that’s long term.
Who Benefits from Inflation?
The Federal Reserve believes some inflation is good and even necessary to maintain a healthy economy. The key is keeping inflation rates at acceptable levels, such as the 2% annual inflation rate target. Staying within this proverbial Goldilocks zone can result in numerous positive impacts for consumers and the economy in general.
That said, the core inflation rate began to climb out of that range in Q1 of 2021, and reached a peak of about 9.02% in June 2022. As of Q3 2023, the inflation rate has eased down in the 4.0% range, according to data from the Consumer Price Index.
Inflation Pros
Sustainable inflation can yield these benefits:
• Higher employment rates
• Continued economic growth
• Potential for higher wages if employers offer cost-of-living pay raises
• Cost-of-living adjustments for those receiving Social Security retirement benefits
The danger, of course, is that inflation escalates too rapidly, requiring the Federal Reserve to raise interest rates as a result. This increases the overall cost of borrowing for consumers and businesses.
Who Is Inflation Good For?
Inflation can benefit certain groups, depending on how it impacts Fed shapes monetary policy. Some of the people who can benefit from inflation include:
• Savers, if an interest rate hike results in higher rates on savings accounts, money market accounts or certificates of deposit
• Debtors, if they’re repaying loans with money that’s worth less than the money they borrowed
• Homeowners who have a low, fixed-rate mortgage
• People who hold investments that appreciate in value as inflation rises
💡 Quick Tip: Distributing your money across a range of assets — also known as diversification — can be beneficial for long-term investors. When you put your eggs in many baskets, it may be beneficial if a single asset class goes down.
Who Does Inflation Hurt the Most?
Some of the negative effects of inflation are more obvious than others. And there may be different consequences for consumers versus investors.
Inflation Cons
In terms of what’s bad about inflation, here are some of the biggest cons:
• Higher inflation means goods and services cost more, potentially straining consumer paychecks
• Investors may see their return on investment erode if higher inflation diminishes purchasing power, or if they’re holding low-interest bonds
• Unemployment rates may climb if employers lay off staff to cope with rising overhead costs
• Rising inflation can weaken currency values
Inflation can be particularly bad if it leads to hyperinflation. This phenomenon occurs when prices for goods and services increase uncontrolled over an extended period of time. Generally, this would mean an inflation growth rate of 50% or more per month. While hyperinflation has never happened in the United States, there are many examples from different time periods around the world: For example, Zimbabwe experienced a daily inflation rate of 98% in 2007-2008, when prices doubled every day.
Recommended: How to Protect Yourself From Inflation
Who Is Inflation Bad For?
The negative impacts of inflation can affect some more than others. In general, inflation may be bad for:
• Consumers who live on a fixed income
• People who plan to borrow money, if higher interest rates accompany the inflation
• Homeowners with an adjustable-rate mortgage
• Individuals who aren’t investing in the market as a hedge against inflation
Inflation and higher prices can be detrimental to retirees whose savings may not stretch as far, particularly when health care becomes more expensive.
If the cost of living increases but wages stagnate, that can also be problematic for workers because they end up spending more for the same things.
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How to Invest During Times of Inflation
While inflation is an investment risk to consider, some investing strategies can help minimize its impact on your portfolio.
How to Protect Your Money From Inflation
The first step is to understand that inflation rates may be variable from year to year, but the upward trend in the cost of goods and services is typically a factor investors must contend with. Essentially, if inflation is historically about 2% per year, it’s ideal to look for returns above that.
For example, while savings accounts may yield more interest if the Fed raises interest rates, investing in stocks, exchange-traded funds (ETFs) or mutual funds could generate higher returns, though these investments also come with a higher degree of risk.
• Diversification. Having a diversified portfolio that includes a mix of stock and bonds and other asset classes may help mitigate the impact of inflation.
• Always be aware of investment costs and the impact of taxes and fees. Minimizing investment costs is a time-honored way to keep more of what you earn.
• Investing in Treasury-Inflation Protected Securities (TIPS). TIPS are government-issued securities designed to generate consistent returns regardless of inflationary changes.
• If prices are rising, that can increase rental property incomes. You could benefit from that by investing in real estate ETFs or real estate investment trusts (REITs) if you’d rather not own property directly.
• Compounding interest allows you to earn interest on your interest, which is key to building wealth.
• Dollar-cost averaging means investing continuously, whether stock prices are low or high. When inflationary changes are part of a larger shift in the economic cycle, investors who dollar-cost average can still reap long term benefits, despite rising prices.
The Takeaway
Inflation is unavoidable, but you can take steps to minimize the impact to your personal financial situation. Building a well-rounded portfolio of stocks, ETFs and other investments is one strategy for keeping pace with rising inflation. Being aware of how taxes and fees can impact your returns is another way to keep more of what you earn.
Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
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FAQ
How is economic deflation different from inflation?
Deflation is when the cost of goods and services trends downward rather than upward (the sign of inflation). Deflation can be positive for consumers, as their money goes further, but prolonged deflation can also be a sign of a contraction.
How do homeowners benefit from inflation?
Typically tangible assets like real estate tend to increase in value over time, even in the face of inflation. Currency, on the other hand, tends to lose value.
How does the government measure inflation?
The Bureau of Labor Statistics produces the Consumer Price Index (CPI), based on the change in cost for a range of goods and services. The CPI is the most common measure of inflation.
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Determining your retirement goals requires an assessment of your current financial situation, calculating how much you think you’ll need post-retirement, and then figuring out what you’ll need to do to reach those goals. It’s not an exact science, and everyone’s retirement goals will be different.
However, there are some common things to consider, and a general set of steps that you can take to try and figure out your goals and calculations.
Putting Retirement Goals Into Perspective
Before you dive into figuring out your retirement goals, it may be worthwhile to recap the tools that can help you reach retirement. There are different types of retirement accounts, for instance, such as individual retirement accounts (IRAs) or employer-sponsored retirement plans, like 401(k)s. IRAs and 401(k)s have their similarities and differences, but both are designed to help people save and invest for retirement.
Using one or either of those vehicles may or may not help you reach your retirement goals. It may be best to seek the advice of a financial professional to help you sort it all out.
You should also know that retirement goals are personal. As mentioned, not everyone will have the same end-goals in mind. There are things to think about: How much risk are you willing to take when you invest your money for the future? How much time do you think you have before you actually want to retire? What do you want your day-to-day lifestyle to look like once you retire?
Again, only you will be able to answer these questions. But they’re important to help you gain clarity and perspective on your post-retirement life, and can help you calcify your retirement goals.
With all of that in mind, here are some steps you can take to help you determine your retirement goals, starting with getting a grasp on your current financial situation.
Step 1: Assess Your Current Financial Situation
One step you can take to determine your future goals is to get a solid picture of your present — somewhat like a personal audit. A careful inventory of your current expenses, income, taxes, and savings — more or less a look at your personal budget — can give you an honest picture of where you are, as well as a realistic look at where your money is going each month.
Once you’ve determined your day-to-day financial picture, you can create a list of any current retirement savings you already have, such as in aforementioned 401(k) accounts, IRAs, or high-yield savings accounts. Total up that number, because you’ll be able to subtract it from your goal.
Step 2. Use a Retirement Calculator
A retirement calculator can help you figure out your overall 20-year lump sum goal by working with variables such as your current age, salary, and savings, your desired retirement age, and how much you save per year.
Here’s where you can change up the numbers and consider several scenarios. If you were to retire at 67, for example, how much money would you need? What would happen if you were able to up your yearly savings by just 3%? You might even calculate the amount of money you’d need to save to retire early.
Step 3. Digest Your Enormous Number
The number may be larger than you anticipated, and that’s okay. It’s probably better to be honest about what you need to reach to retire. So, calculate your number, digest it, and move on.
Step 4. Break Down Your Number
It may be helpful to break things down into easier-to-tackle chunks, and make annual or monthly goals to hit. To do this, you could subtract your current age from your intended retirement age, then divide that number by the total. That’s your yearly goal. If it’s still overwhelming, you might divide that number by 12 for your monthly goal. Go as far as you need to make it palatable.
For example, if your total number is $800,000 and you’re 30 years from retirement, that breaks down to around $75 a day. But that doesn’t mean you have to put that much into the bank by yourself. A next step you could take is finding the retirement savings plans that will do the most to grow your money.
Step 5. Choose the Right Retirement Plan(s) For You
Most workers these days don’t have pension plans, but there are other options. If your employer offers a 401(k) matching plan, one of the easiest ways to grow your retirement nest egg is to contribute the max amount of money each paycheck that your employer is willing to match.
The contributions are automatically deducted from your paycheck pre-tax, and since you never see the money, it can be much easier to just pretend like it was never there to begin with. For the self-employed, or for diversification, traditional or Roth IRAs are also specifically designed to help your savings grow.
The biggest advantages of 401(k) and IRA plans are their potential tax savings. However, they can come with yearly contribution limits that may not mesh with your retirement objectives. In this case, a general investment account is another possible consideration for growing your wealth. While it likely doesn’t come with tax advantages, it doesn’t come with contribution limits, either.
If investing in the market leaves you feeling wary, or you don’t like the idea of not having access to your money until you reach a certain age, another option to consider is a high-yield savings account.
Step 6. Stick To Your Goals
You’ve calculated your retirement goal. You’ve determined a plan to reach it. And now it’s time for arguably the hardest part: Sticking to the plan.
For as many investment or retirement accounts as possible, you might consider setting up automatic contributions to withdraw every payday. The more you can automate, the less you’ll be tempted to move things around.
One move you may want to consider, however, is rolling over funds from an old 401(k) to a rollover IRA, so you can better manage your retirement savings overall.
The Takeaway
Determining your retirement goals isn’t an exact science, as everyone will have different goals, risk tolerances, and time horizons to take into consideration. With that in mind, though, there are some general steps you can take to determine your goals, and to create a plan that will help you reach them.
You can also use a variety or combination of different investment accounts, like IRAs or 401(k)s, to help you reach your goals. It’s likely going to be a multi-pronged approach, but with a proper plan, you can maximize your chances of success.
Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
Help grow your nest egg with a SoFi IRA.
SoFi Invest® The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results. Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below. 1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A. Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances. Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice. SOIN0523032
The investor community is split into two factions: FIRE vs. YOLO.
The YOLO crowd includes the people who read Reddit’s r/WallStreetBets, who chase speculative trades, who place margin trades on Robinhood.
They share stock tips on Discord and bet on whatever appears in their chat feed. Earlier this week they piled investments into Galway Metals, Inc., briefly shooting up the trading volume, for no reason other than that its ticker symbol is GAYMF.
They poured into Dogecoin last night, a cryptocurrency with the face of a dog that started as a joke, causing the price to skyrocket 205 percent in a single day.
They’re placing margin bets on GameStop, triggering a short squeeze, and riding it to the moon.
They treat the stock market like a casino; they feed off tales of survivorship bias. They’re seeking alpha*, buying meme stocks**, and turning their $600 stimulus checks (“stimmies”) into the ultimate prize: enough profits to purchase a meal of chicken tenders, or “tendies.”
They’re nothing like the FIRE folks.
The FIRE crowd is passionate about index funds, passive investing, and long-term buy-and-hold. We prefer Vanguard over Robinhood and embrace the Boglehead investing philosophy.
We hope to keep pace with the overall market, not beat it, and we cite academics and advisors with peer-reviewed research to back up our ideas.
We debate about whether the 4 percent withdrawal rule is too conservative or aggressive; should it be adjusted to, say, 3.5 percent – 4.5 percent? We agonize over asset allocation and wonder whether we should add a REIT or international equities component to our two-fund portfolio. We know the expense ratio on our Vanguard target date fund.
The YOLO crowd thinks the FIRE crowd is boring, slow, conservative.
The FIRE crowd thinks the YOLO crowd is bro-ey, speculative, and unmoored from reality.
For years, the FIRE and YOLO camps maintained a peaceful coexistence, blissfully ignoring one another, each crowd living in its own universe.
We were content to ignore them; they were content to ignore us.
That changed yesterday.
Yesterday, major trading platforms did something so outrageous that their actions triggered a Congressional request for a Dept. of Justice investigation, inspired a class action lawsuit, and rapidly united the FIRE and YOLO camps into strange bedfellows.
What did they do?
They blocked us from the markets. They didn’t let us trade.
Yesterday, almost every major brokerage, including Robinhood, Schwab, Ally, Fidelity, and TD Ameritrade, halted trades on many high-profile stocks, freezing retail investors like you and me out of the game.
They targeted the trading freeze on stocks targeted by the Wall Street Bets subreddit, including GameStop, Nokia, Blackberry and AMC Theaters.
This means individual investors — you, me, Grandma — literally could not get in on the action.
To be fair, this is standard protocol when prices change too rapidly; it’s a safeguard to prevent another 2010 ‘flash crash.’ But typically, these types of trading halts affect everyone, both institutional and individual investors alike. That didn’t happen yesterday.
Individual investors (also known as ‘retail investors’) who wanted to sell were sidelined, watching prices fluctuate on assets that they wanted to liquidate, but couldn’t. They watched their gains evaporate while only a limited segment of the market — the major hedge funds and institutional investors — could freely transact.
Congressman Paul Gosar, in his request for a DOJ investigation, described this as “a concerted effort to de-platform and silence individual investors.”
When trading resumed, many brokerages — most notably Robinhood — only offered one-way trades: you could sell, but you couldn’t buy.
This is a move that drives markets. If the only choices are to hold or sell, eventually retail investors must unload, driving prices down. It reeks of market manipulation.
It outraged every individual investor.
Yesterday, FIRE and YOLO united under a common banner:
Let the people trade.
On Wednesday afternoon, I recorded a 20-minute podcast episode outlining the FIRE perspective on the GameStop rise.
I explained the history of meme stocks, the mechanics of short sales, and how the speculative frenzy over GameStop can be framed into a broader context.
On Thursday morning, when trading halted, I recorded another 9-minute episode explaining why this is an affront to all individual investors.
“Yesterday, I advised you not to be stupid,” I said. “Today, I defend your right to be stupid.”
If you want a rundown of everything that’s happened this week, listen to those two episodes.
There’s enormous context and depth to this story.
It’s a David vs. Goliath narrative — with a myriad of reasons why that narrative shouldn’t be taken at face value.
It’s a behind-the-scenes story of market makers and high-frequency traders.
It’s a story involving SEC regulations, credit line limits, and unanswered questions about decisions made in the days before the trading halt.
It’s a story of social media vs. Wall Street …⠀
… and the innocent bystanders who get caught in the crossfire. ⠀
It’s a story of stonks, stimmies, tendies, and the rise of meme stocks.
It’s a story of market manipulation and the reality that a subreddit can move markets faster than the Treasury Department. ⠀
I’ll write a detailed article next week providing context and history around Wall St Bets, GameStop, and the rise of meme stonks.
For the moment, if you want a primer on the craziness of this week, here’s where to look:
Until next week,
Paula
*“seeking alpha” is a phrase used by investors to indicate that they’re aiming for better-than-market returns.
**a “meme stock” is any stock that gets bid up based on a groundswell of enthusiasm from individual investors, not as a result of fundamentals but rather as a result of flash trends.