Futures put the odds of a quarter-point Fed increase on December 9 at about 78% after October’s 165,000 jobs, with inflation at 3.6% and the S&P 500 5.6% below its October 6 high.
Since 2000 the Fed has raised rates 14 times with the index 5% or more below its high; a year later the index was higher in 12 cases, and the two losses were the first increases of 2022.
In 2022 a 60/30/10 mix of $1,800,000 lost $262,196 because stocks (-18.2%) and bonds (-12.9%) fell together; the couple’s $720,000 outside stocks is 11.1 years of withdrawals.
Fed Chair Kevin Warsh is expected to raise interest rates again on December 9, into a stock market still 5.6% below its October high, and the last time the Fed did that, in 2022, a retired couple with $1,800,000 split between a stock index fund, a bond index fund and cash lost about $260,000 in a year.
The odds come from the futures market. After Friday’s jobs report, which showed employers added 165,000 jobs in October and unemployment slipped to 4.1%, traders put the chance of a quarter-point increase at the Fed’s December 8 and 9 meeting at about 78%, Reuters reported, and by Sunday CME’s FedWatch tool had it at 81%. The Fed raised its benchmark rate on September 16 for the first time since July 2023, to a range of 3.75% to 4%, and held it there on October 28 by a vote of 10 to 2, with the two dissenters, Lisa Cook and Beth Hammack, wanting another increase that day. Inflation by the Fed’s preferred measure was 3.6% in September, 3.1% without food and energy, against a 2% target.
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A rate increase with stocks already falling reads as a warning to retirees that the Fed will not step in to cushion this decline the way it did in 2008 and 2020, when inflation gave it room to cut. The record since 2000 also says the market was higher a year later in 12 of the 14 cases, so the warning is about the next few months rather than the next few years.
Warsh described the mechanism at his October 28 press conference: “Interest rates get in the cracks. Interest rates affect directly or indirectly, almost everything.” KPMG chief economist Diane Swonk told Yahoo Finance that higher rates taking “a little steam off of equity prices” can cool inflation among the wealthiest households. If you are retired and living off a portfolio, you are the household that policy is aimed at.
Take a 68-year-old retired engineer and his wife, 65, a retired school administrator. They have $1,800,000: $1,080,000 in an S&P 500 index fund, $540,000 in a total bond market index fund and $180,000 in a money market fund, a 60/30/10 mix. Social Security pays them $3,600 a month, $43,200 a year. They spend $108,000, so $64,800 a year comes out of the portfolio, a 3.6% withdrawal rate. Those are assumptions, so put your own numbers beside them.
The 14 times the Fed did this since 2000
Since 2000 the Fed has raised its target rate 40 times. On 14 of those days the S&P 500 closed 5% or more below its high of the previous year, which is where it sits now. The table shows how far the index was below its high that day, how much further it fell within 12 months, and where it stood a year later, using the largest S&P 500 index fund with dividends excluded.
The median outcome a year later was a gain of 14.6%. The two losses are the ones that should hold your attention, because they look most like December: the first two increases of 2022, made early in a cycle with inflation running hot. After the March 2022 increase the index fell another 18.1% within the year, and after the May increase another 16.9%. Top to bottom, the S&P 500 fell 25.4% from January 3, 2022 to October 12, 2022, and it took until January 19, 2024 to get back to its starting point, with the Fed raising the whole way. December would be the second increase of this cycle; September’s came with the index 3.1% below its high, and the Fed’s own projections call for one more increase this year, then a hold at 4.1% through 2027.
What 2022 did to their money
Run the couple’s mix through 2022, price change plus the distributions each fund paid that year. The stock fund lost 18.2%, so $1,080,000 became $883,971, a drop of $196,029. The bond fund lost 12.9% as yields rose, so $540,000 became $470,080, a drop of $69,920. The money market fund earned about what three-month bills paid that year, 2.09%, and grew to $183,754. The portfolio went from $1,800,000 to $1,537,804, a loss of $262,196, or 14.6%, before a dollar was withdrawn. Call it $260,000.
The bond side is the part you may not expect. In 2008 and 2020 bonds rose while stocks fell, because the Fed was cutting. When the Fed raises into a decline, both sides fall at once, and your 60/40 mix gives up most of its cushion. On the smaller balance the same $64,800 withdrawal becomes 4.2% of the portfolio; holding to 3.6% would mean $55,361, a cut of $9,439 a year.
What the next quarter point does to each sleeve
The bond fund’s effective duration is 5.73 years, so each full point that yields rise takes about 5.7% off its price, $30,942 of the $540,000. The 10-year Treasury yield was 4.84% on November 5 after reaching 5.31% on October 5. A return to that October high, 0.47 point higher, would cost the fund about 2.7%, or $14,543. The fund yields 4.98%, which is $26,892 a year of income, so that hit is covered in about six months.
The money market fund is the one place a rate increase helps you: a quarter point on $180,000 is $450 a year, on top of the 4.17% short rates paid on November 5.
The stock fund has no formula. The table is the best guide you have: the first year after an increase like this one has run from a gain of 32.9% to a loss of 9.1%, with a median dip of 5.8% along the way.
The plan
First, count your years. The couple’s $540,000 in bonds and $180,000 in cash add up to $720,000, which is 11.1 years of the $64,800 they take out. Even after a 2022-sized year, the stock fund can sit untouched until it recovers, and the last recovery took two years. The rescue the Fed is not offering is already in their account. If you count fewer than five years of withdrawals outside stocks, that is your number to fix before December 9.
Second, take next year’s withdrawals from the money market fund, which gains on a rate increase, and leave the bond fund alone until yields settle. Selling bonds that have just fallen turns a temporary loss into a permanent one.
Third, do not sell stocks ahead of the meeting. A year later the index was higher in 12 of the 14 cases, and anyone who sold in March 2022 then had to pick a day to buy back during a 25% decline.
Fourth, if the 2022 pattern repeats and your portfolio falls the way theirs would, toward $1,537,804, trim the withdrawal to $55,361 for a year rather than selling into the decline. That is $787 a month less, and it keeps the 3.6% rate intact.
Where this is weak
Fourteen cases is a small sample, and 10 of them come from one cycle, 2022 to 2023. Futures odds move daily: Thursday’s selloff took the December odds down to about 67% before the jobs report took them back up, and Tuesday’s inflation report will move them again. The couple’s income, spending and mix are assumptions, and the bond math uses duration, an approximation that loses accuracy on large moves. Nobody knows whether the Fed raises on December 9, including, by his own account, Warsh.
The bottom line
Traders see roughly four chances in five that Fed Chair Kevin Warsh’s Fed raises rates on December 9 with the S&P 500 5.6% below its high. The Fed has done that 14 times since 2000; the index was higher a year later in 12 of them, and the two exceptions were the first increases of 2022, the cycle that most resembles this one. A couple with $1,800,000 in a 60/30/10 mix lost $262,196 in 2022 because stocks and bonds fell together. Their defense is the $720,000 outside stocks, 11.1 years of withdrawals, taken from the money market fund first. Count your own years before the meeting, and let your stock fund wait out the year.
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If you’ve saved over $1,000,000, this guide is for you. The last thing you want in retirement is to run out of money, you want your money to generate lasting income while you enjoy your life.
Now you can learn the strategies wealthy retirees use to fund their retirement with The Definitive Guide to Retirement Income from Fisher Investments. Download the guide today! (sponsor)
