Interest Rates and Your Retirement: What Rising and Falling Rates Mean

Interest rates affect nearly every aspect of retirement planning—from the yield on your savings to the cost of borrowing against your home.

Yet most retirement advice ignores rates entirely, assuming a static environment that doesn't exist.

Whether rates are rising, falling, or holding steady, here's how to adapt your strategy.

Interest Rates 101: What Actually Moves

When people say "interest rates," they might mean several different things:

Rate	What It Is	Who Sets It
Federal Funds Rate	Rate banks charge each other overnight	Federal Reserve
Prime Rate	Base rate for consumer lending	Banks (Fed Funds + 3%)
10-Year Treasury	Benchmark for mortgages, bonds	Market forces
30-Year Treasury	Long-term government borrowing	Market forces
CD/Savings Rates	What you earn on deposits	Banks (competitive)

The relationship: The Fed directly controls short-term rates. Long-term rates respond to inflation expectations, economic growth forecasts, and supply/demand dynamics.

How Rates Affect Retirement Assets

Bonds and Bond Funds

This is where rates matter most—and where most retirees get surprised.

The inverse relationship: When interest rates rise, existing bond prices fall. When rates fall, bond prices rise.

Why it happens: If you own a bond paying 3% and new bonds pay 5%, nobody wants your 3% bond at full price. Its market value drops until the yield matches.

Example:

Scenario	Your Bond	Market Action
You buy 10-year bond at 3%	$10,000 face value	N/A
Rates rise to 5%	Bond worth ~$8,400	16% loss
Rates fall to 2%	Bond worth ~$10,900	9% gain

The duration factor: Longer-term bonds are more sensitive to rate changes. A 1% rate increase affects a 30-year bond far more than a 2-year bond.

Cash and CDs

Rising rates = good news for savers. Higher yields on savings accounts, CDs, and money markets.

Falling rates = bad news for savers. The cash cushion you're counting on produces less income.

Current reality (late 2025): After aggressive Fed rate cuts, savings yields have declined from 5%+ peaks. High-yield savings now around 4%.

Annuities

Annuity payouts are directly tied to interest rates at the time of purchase.

Higher rates = higher payouts

Rate Environment	$500,000 SPIA* Monthly Payout
Low rates (2020-2021)	~$2,400
Higher rates (2023-2024)	~$2,900
Difference	$500/month ($6,000/year)

*Single Premium Immediate Annuity, age 65

Planning implication: Locking into an annuity during low-rate environments permanently reduces your income. Consider waiting or using a ladder strategy.

Life Insurance Cash Values

Permanent life insurance (whole life, universal life) earns interest on cash values. Rate environments affect credited rates:

Whole Life: Dividends (which affect cash value growth) are influenced by the insurer's bond portfolio yields. Rising rates eventually increase dividends, with a lag.

Universal Life: Credited rates respond more quickly to market conditions. Current declared rates often track short-term Treasury yields.

Indexed Universal Life: Floor and cap rates are set based on options costs, which are influenced by interest rates. Higher rates generally mean higher caps.

Learn more about IUL credited rates →

Rising Rate Strategy Playbook

When rates are increasing or expected to increase:

1. Shorten Bond Duration

Reduce exposure to long-term bonds; favor short-term bonds and bond funds.

Bond Type	Duration Risk	Rate Sensitivity
Money Market	~0	Minimal
Short-term Bonds	1-3 years	Low
Intermediate Bonds	4-7 years	Moderate
Long-term Bonds	10+ years	High

Action: Shift from aggregate bond funds to short-term or ultra-short bond funds during rising rate environments.

2. Consider Floating Rate Instruments

Floating rate notes and bank loan funds adjust their yields as rates rise, providing natural protection.

Tradeoff: Often lower credit quality (higher default risk).

3. Build CD Ladders

Instead of one large CD, create a ladder:

CD	Amount	Term	Rate
1	$50,000	6 months	4.25%
2	$50,000	12 months	4.50%
3	$50,000	18 months	4.75%
4	$50,000	24 months	5.00%

As each CD matures, reinvest at (potentially higher) current rates.

4. Delay Annuity Purchases

If rates are rising, waiting to buy an annuity means higher future payouts.

Exception: If you need guaranteed income now, waiting creates its own risk.

5. Accelerate Mortgage Payoff?

Rising rates don't affect existing fixed-rate mortgages. But they raise the opportunity cost of cash.

The math: If your mortgage is 3.5% and savings yield 5%, keeping the mortgage and investing the difference is mathematically advantageous—assuming you'll actually invest it.

Falling Rate Strategy Playbook

When rates are decreasing or expected to decrease:

1. Extend Bond Duration

Lock in higher yields before they disappear. Existing bonds will appreciate as rates fall.

Action: Consider moving from short-term to intermediate or long-term bonds.

2. Lock In Annuity Rates

If you're planning to annuitize, do it before rates fall further.

Strategy: Partial annuitization now, with additional purchases if rates fall further (DCA for annuities).

3. Refinance Floating Debt

If you have HELOCs, ARMs, or other variable rate debt, consider refinancing to fixed.

4. Lock In Insurance Caps

IUL policies issued during higher rate environments typically have higher caps. Starting a policy when rates are elevated locks in potentially better crediting terms.

5. I-Bonds and TIPS

When falling rates signal deflation concerns, inflation-protected securities provide a hedge.

I-Bond current rate: Based on a fixed rate plus inflation adjustment (check TreasuryDirect.gov for current rates).

The Rate-Neutral Strategy

Rather than constantly adjusting for rate predictions (which are notoriously unreliable), consider building a rate-neutral retirement strategy:

Diversify Income Sources

Don't rely entirely on rate-sensitive assets:

Income Source	Rate Sensitivity	Your Allocation
Social Security	None	Fixed
Pensions	None	Fixed
Dividend Stocks	Low	Variable
Bonds	High	Variable
Annuities	Fixed at purchase	Fixed
Real Estate	Moderate	Variable
Section 7702	Low-Moderate	Variable

Use Multiple Strategies

Rather than all-in on any single approach:

Conservative: 60% guaranteed income (SS, pension, annuities) + 40% growth assets

Balanced: 40% guaranteed + 40% growth + 20% alternative (real estate, insurance)

Growth-oriented: 30% guaranteed + 50% growth + 20% alternative

Focus on What You Can Control

You can't control:

Federal Reserve decisions
Inflation trajectory
Bond market movements

You can control:

Savings rate
Tax efficiency
Asset location
Withdrawal strategy
Insurance and protection

Rate Impact on Section 7702 Strategies

Interest rates affect life insurance strategies in several ways:

Whole Life Dividends

Insurance company general accounts (invested heavily in bonds) produce higher returns when rates are elevated. This flows through to policy dividends over time.

Current environment: After years of low rates, insurers are benefiting from higher reinvestment yields. Expect dividends to improve gradually.

Universal Life Crediting

UL credited rates track short-term rates more closely. Current environment offers better crediting than the 2020-2021 period.

Indexed Universal Life

IUL caps are determined by the cost of options used to provide index-linked returns. Higher rates generally support higher caps.

Rate Environment	Typical Cap Range
Low rates (2020-2021)	8-10%
Higher rates (2023-2025)	9-12%

Planning note: Policies illustrated with high caps may see lower caps if rates fall significantly. This affects long-term projections.

Policy Loans

Policy loan rates are typically fixed (often 5-8%) regardless of market rates. In a high-rate environment, this can be advantageous compared to other borrowing options.

Compare policy loan rates →

Real-World Application: Sarah's Situation

Sarah, 62, has $2M in retirement assets:

$800,000 traditional IRA (60% stocks, 40% bonds)
$400,000 Roth IRA
$500,000 brokerage (dividend stocks)
$300,000 cash/CDs

Her concerns:

Bond portion lost 13% in 2022
CD rates are declining
Wants guaranteed income but fears locking in falling rates

Rate-aware strategy:

Shorten bond duration in IRA to 3-5 years average
Build CD ladder with 6, 12, 18, 24-month maturities
Consider partial immediate annuity ($200,000) to lock current rates
Start IUL policy ($50,000/year premium) for tax-free income and current cap rates
Delay Social Security to age 70 for inflation-adjusted guaranteed income

Result: Diversified rate exposure with no single strategy dominating.

Interest Rate Predictions: Don't Bet the Farm

Financial media constantly predicts rate movements. The track record is poor.

December 2021: Consensus forecast: Rates staying low through 2023 Actual: Most aggressive rate increases in 40 years

December 2023: Consensus: 6-7 rate cuts in 2024 Actual: 2-3 cuts, much later than expected

The lesson: Build strategies that work in multiple rate environments rather than betting on predictions.

Action Steps

Assess Your Rate Exposure

Calculate bond duration across all accounts
Identify floating rate debt
Review insurance policy crediting rates
Check annuity contracts for rate assumptions

Build Rate Resilience

Diversify fixed income by duration
Create CD or bond ladders
Include rate-insensitive income sources
Consider inflation protection (I-Bonds, TIPS)

Take Advantage of Current Environment

Lock in favorable insurance policy terms
Evaluate annuity purchases if income needed
Refinance floating debt if appropriate
Review mortgage strategy

Ready to rate-proof your retirement?

Schedule a Retirement Income Review →

This article is updated as interest rate conditions change. Last updated: December 8, 2025

Related reading: