Last week, Russia raised its key interest rate 17% to 10.5%. (Bloomberg, 2014) While I personally believe raising the interest rates would be good for America’s economy and long-term economic success, I do recognize the rise would impact our military; specifically, our military retirement plans. Rising interest rates will make our military retirement less valuable.
Our military retirement is fixed; which means the variables do not go up and down. Our retirement is based on what rank we retired as and how many years we served. Our retirement doesn’t change based off of America’s interest rates; only the annual inflation adjustment.
We can see the impact to our retirement plan using my “Military Retirement Value” calculation blog post. A Major at 20 years (I use this because it applies to me) will receive $3,715 a month in retirement. By comparing it to the yield on a 30-year bond (3%), the retirement is worth $1.5M. If interest rates rise to 4% then the retirement would be worth $1.1M; 5% is $892K. The reason why is because civilians can invest their retirement and gain from higher interest rates, while a fixed military retirement suffers because of rising interest rates.
I personally believe the economy will see inflation and America will be too slow to raise the interest rates to slow it down. The costs of normal consumer goods and borrowing money will rise. Groceries will be more expensive and your credit card interest rates will rise while your retirement will stay the same and you’ll have to wait for the lagging annual inflation adjustment.
What can you do to reduce the impact?
The first thing to do is eliminate all adjustable-rate credit sources. These will increase when the interest rates rise while your income will probably not.
Next, take advantage of the rising interest rates. When then interest rates increase you can find safer investments then stocks to get the same yields. Most people won’t have the flexibility to take advantage unless you’ve been a long-time reader of this blog.
If you’ve been a long-time reader, leave me a comment.
Source: http://www.bloomberg.com/news/2014-12-15/russia-increases-key-interest-rate-to-17-to-stem-ruble-decline.html
Looks like a useful blog, Brandon. In response to your query, feel free to add me to your Blog Roll. We are located in Lawton/Ft. Sill, OK. Plenty of military people here.
ReplyDeletehttp://payoffmyrentals.blogspot.com/