Interest rates are back at the center of retirement planning. In September 2026 the Federal Reserve raised its policy rate for the first time since 2023, and long-term Treasury yields have climbed to levels not seen in more than two decades. Inflation has also moved higher again.

For retirees, this cuts both ways. Savers can earn more on cash and bonds than at almost any point in the last twenty years. But existing bonds lose market value when rates rise, borrowing costs more, and inflation quietly shrinks what each withdrawal buys. Below are the main tools and the trade-offs we weigh in this environment.

Why rising rates matter for your income

Bond prices and interest rates move in opposite directions. When new bonds pay more, older bonds with lower coupons become less attractive, so their prices fall. How much they fall depends on duration, a measure of a bond's sensitivity to rate changes. As a rough guide, a bond fund with a duration of six years may lose about 6% of its value if rates rise by one percentage point.

That drop matters most if you have to sell. Hold an individual bond to maturity and, if the issuer pays as promised, you get face value back. Bond funds have no maturity date, so rate increases are felt more directly.

Inflation is the second pressure. A retiree withdrawing a fixed dollar amount loses purchasing power each year prices rise. Higher yields help only if they stay ahead of inflation after taxes.

Building the reserve layer: cash, CDs and Treasuries

Most retirement income plans we design start with a reserve covering one to three years of planned withdrawals. In a high-rate environment, that reserve can finally earn a meaningful yield.

• Money market funds. Yields tend to follow the Fed's policy rate closely, and money is accessible within a day or two. The downside: if the Fed later cuts rates, that income drops quickly. Money market funds are not bank deposits and are not FDIC insured.
• CDs. Bank CDs lock in a rate for a set term and are FDIC insured up to applicable limits. Early withdrawal usually triggers a penalty, and brokered CDs sold before maturity can lose value.
• Treasury bills and notes. Backed by the U.S. government and exempt from state and local income tax, which can be useful for Virginia residents. Prices still move with rates if you sell early.

Bond ladders: managing rate risk on purpose

A bond ladder spreads money across bonds (or CDs) that mature in successive years, for example one rung each year for the next eight to ten years. Each year a rung matures and either funds that year's spending or is reinvested at the far end of the ladder at whatever rate is then available.

When rates rise, maturing rungs can be reinvested at higher yields, and interim price swings matter less because each bond is held to maturity. The trade-offs: ladders take work to build, individual bonds can be less liquid than funds, corporate and municipal bonds carry credit risk, and if rates fall you will reinvest at lower yields. We usually build ladders primarily from Treasuries and high-quality issues and match maturities to the client's actual spending plan.

The goal is not to predict where rates go next, but to make sure next year's income does not depend on it.

TIPS and I bonds: built-in inflation adjustment

Treasury Inflation-Protected Securities (TIPS) adjust their principal with the Consumer Price Index, so both the principal and the interest payments rise with inflation. A TIPS ladder can create a stream of income designed to keep pace with prices. Considerations: TIPS prices still fall when real (after-inflation) yields rise, the inflation adjustment is taxable each year even though you do not receive it until maturity, so many investors hold TIPS in IRAs, and they can underperform regular Treasuries if inflation comes in lower than expected.

Series I savings bonds pay a fixed rate plus an inflation rate that resets every six months. Bonds issued May through October 2026 earn a composite 4.26%, including a 0.90% fixed rate that lasts for the life of the bond. Limits: annual purchase caps keep I bonds a small part of most portfolios, they cannot be cashed in during the first year, and redeeming before five years costs the last three months of interest.

Fixed annuities and MYGAs: higher guaranteed rates, less flexibility

Insurers invest largely in bonds, so when rates rise, the rates they offer on fixed annuities generally rise too. A multi-year guaranteed annuity (MYGA) works much like a CD issued by an insurance company: it credits a declared rate for a set term, often three to ten years, with tax-deferred growth.

The trade-offs are real and need to be weighed carefully:

• Surrender charges. Withdrawals above a free amount (often around 10% a year) during the term usually trigger surrender charges, and some contracts add a market value adjustment.
• Insurer strength. Guarantees depend on the claims-paying ability of the issuing insurer, not on the FDIC or the U.S. government. State guaranty associations provide limited backup.
• Taxes. Gains are taxed as ordinary income when withdrawn, and withdrawals before age 59½ may face a 10% IRS penalty.
• Other annuity types. Fixed indexed annuities link credits to a market index subject to caps, participation rates or spreads, and income riders typically carry annual fees. Immediate annuities convert a lump sum into lifetime income but generally give up access to the principal.

For some retirees, a portion of savings in a fixed annuity can help cover essential expenses alongside Social Security or a pension. Our Страхование work focuses on comparing contract terms, costs and insurer ratings before any decision.

Dividend stocks and rate-sensitive sectors

Dividend stocks have long been a source of retirement income, and companies that grow their dividends may help offset inflation over time. But when Treasuries pay over 5%, some income-focused investors shift from stocks to bonds, which can pressure "bond proxy" sectors such as utilities, REITs and consumer staples. Higher borrowing costs can also squeeze companies that carry heavy debt. Dividends are never guaranteed and can be cut. We generally prefer to treat dividend stocks as part of a diversified growth allocation rather than as a substitute for bonds.

Inflation and your withdrawal rate

Rising prices raise the dollar amount you need each year, which can push your withdrawal rate higher just as markets are volatile. A few practices can help:

• Separate needs from wants. Cover essential expenses with more predictable sources such as Social Security, pensions, ladders or annuities.
• Use flexible withdrawal rules. Trimming discretionary spending after a poor market year can help the portfolio last longer.
• Mind the tax drag. Interest is taxed as ordinary income, so where you hold bonds, CDs and TIPS (taxable account versus IRA) matters. Coordinating this is part of our Налоговое планирование process.

Debt and refinancing decisions

Higher rates change the math on debt. If you have a low fixed-rate mortgage from earlier years, there is often little reason to pay it off early when cash and Treasuries may earn more than the loan costs. Variable-rate debt, such as home equity lines and credit cards, is the opposite: its cost rises with the Fed, so paying it down may deserve priority. Before buying or downsizing, compare borrowing costs with the return you would give up by paying cash, and keep emergency liquidity.

Frequently asked questions

Should I sell my bond funds because rates are rising?

Not necessarily. Selling locks in losses that have already happened, and higher yields mean the fund's future income is higher. The better question is whether the fund's duration matches when you need the money.

Are CDs or Treasuries better for retirees?

Both can be useful. CDs are FDIC insured up to limits; Treasuries are backed by the U.S. government and are exempt from state income tax. Compare after-tax yield, term and liquidity.

Is now a good time to lock in a MYGA?

Higher rates have improved fixed annuity rates, but locking in means accepting surrender charges and depending on the insurer. It may fit money you are confident you will not need during the term.

How do federal employees fit TSP funds into this?

The TSP G Fund does not lose value when rates rise, and its rate is reset monthly. We discuss TSP strategy in more detail on our federal employees page.