Here’s how savers should plan for higher interest rates

CALGARY – Higher interest rates — whenever they may arrive — will look a lot different from the perspective of a saver than a borrower.

The stretch of rock-bottom rates in recent years has been a boon for those taking on debt for a house or car. Money, in essence, costs less money.

But savings also earn less in interest income in that environment. And that effect hasn’t been great for those saving for retirement.

“The borrowers have enjoyed a great time because, of course, they’ve been paying very little for their money, for their borrowing. The savers of the world have been screaming bloody murder,” said Adrian Mastracci of KCM Wealth Management in Vancouver.

“The savers of the world are looking forward to the higher interest rates and the reality is, so am I. As a portfolio manager, what it tells me is that the economy is getting better by itself and that’s a good thing.”

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Last week, the Bank of Canada announced it would keep its key interest rate at one per cent, the level it’s been at since September 2010.

“We don’t know when higher rates are coming, though you think historically they will come eventually,” said Stan Tepner of CIBC Wood Gundy in Toronto.

“The concept of interest rates affects people first when they get a student loan, then when they get a mortgage and then when they get a credit card and it’s all about ‘let’s see the rates go down so I can afford this better’…It really becomes relevant later in life when you want to rely on a more fixed income diet for your portfolio.”

But portfolio managers caution that higher rates could have some downside for investors.

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A recent survey by Leger, conducted on behalf of CIBC Asset Management, suggested that 58 per cent of Canadians were unaware that rising rates could hit some investments, such as bonds. And for those in the baby boomer age group — arguably those with the most at stake — 65 per cent were clueless about that relationship.

In meeting with clients, Tepner said he tries to make sure the interest rate, bond price relationship is well understood.

“I can’t tell you how often I’ve drawn a very simple picture of a see-saw on a playground,” he said. “On one seat are interest rates and the other side are the price of bonds.”

Tepner said there’s no one size fits all approach. Looking at corporate bonds or vehicles with floating rates may be in order.

“My view is first you have to start with a proper financial plan, the personal financial plan, which is what is your money for — and what I mean is how far in the future are you going to use it? How much are you going to take out at any point in time?” said Tepner.

“It’s hard to just talk about bonds without talking about the big financial planning picture.”

Andrew Beer of Investors Group in Winnipeg said investors have loaded up on bonds in recent years in a flight to safety against the much more volatile stock market.

“You want to make sure you’re not too long in duration, duration being a measure of price sensitivity to changes in interest rates and maybe you want to shorten up your exposure in long-term bonds, go to something a little bit shorter,” said Beer.

Conservative investors who feel safer in a bond portfolio might want to rethink that approach.

“They should have some equity exposure.”