When the Fed hikes rates, here's how it affects retirees and their money

The Federal Reserve's interest rate hike — the first in three years — is a policy shift that will have a domino effect for retirees.

Those in retirement and those nearing retirement need to factor interest rates into their investment decisions. To explain what the Fed hike might mean, Yahoo Finance talked to several wealth management advisers and finance professionals.

First off, it's important to keep in mind that one quarter-point rate hike won't drastically alter anyone's fortunes.

"A single rate hike rarely helps or hurts a retiree outright," said Michael Cochran, chief investment officer at BentOak Capital in Fort Worth, Texas. "It reshuffles the deck where there are benefits, but also some pressures."

A rate hike could be good news because it means that savings yields will likely rise, said LendingTree chief consumer finance analyst Matt Schulz.

"That helps your money grow faster and perhaps last longer, which is so important when you're on a fixed income, as many retirees are," he said.

If you'll need cash savings to finance living expenses, you might be able to take advantage of adding more cash to low-risk, fixed-income investments, such as CDs, money market accounts, or high-yield savings accounts.

"For cash savings, such as money market accounts or short-term CDs, retirees would benefit as banks adjust their yields, said Maria Castillo Dominguez, a financial planner in Hollywood, Fla.

One easy way to do that is to take some of the profits from your equity holdings, which have been robust this year.

"When the Fed raises rates, banks typically respond by offering better yields on these products, which can translate to more income without taking on additional market risk," Dominguez said.

High-yield savings accounts, money market funds, and newly issued CDs "all tend to nudge their rates slightly higher, so retirees keeping money on hand for short-term expenses get a very slight income bump," Cochran said.

Fixed-income investors can benefit too. When an investor purchases new fixed-income issuances, they should enjoy a higher coupon than was available before the hike, he added.

"Reinvesting maturing bonds on a regular schedule ends up capturing higher yields over time, which can work to strengthen future income," Cochran said.

Don't expect changes to happen in a snap, though.

"When the Fed starts hiking, banks, and even online banks, generally don't respond quickly," said Ken Tumin, co-founder of DepositQuest.com. "For example, the last time the Fed started a hiking cycle on March 16, 2022, five major online banks increased their high-yield savings account rates on average by only .08% after six weeks."