Why Retirement Trends Matter to the Fed's Call on Interest Rates

This is the latest in a series of columns about Social Security and retirement income planning.

Retirement is both an important macroeconomic concept and a deeply personal issue for every working American, according to Atlanta Fed President Raphael Bostic, who is preparing to attend a pivotal meeting of the Federal Open Markets Committee later this month. 

Retirement dynamics will be one of the factors Bostic has in mind as he and fellow FOMC members weigh the pros and cons of a potential rate cut during their meeting set for Sept. 17 and 18. 

Tighter conditions can help in the fight against inflation while providing higher income for investors in government bonds, but overly restrictive policies can lead to recessionary pressures and higher unemployment. Effectively balancing these factors is no small feat. 

“Retirement is an important stage of a person’s life,” Bostic told me during a recent interview conducted on the sidelines of the American College of Financial Services’ annual Conference of African American Financial Advisors in Atlanta. “It’s also a big transition by which Americans move from being in the labor market to not being in the labor market.”

To the extent that this transition happens in a regular and predictable flow, Bostic said, that helps economists and policymakers project what the U.S. economy is going to look like in the future — both near- and long-term. 

In addition to retirement affecting the pace of hiring and the supply of labor for employers to draw upon, the rate at which retirees liquidate their investment portfolios and spend down their accumulated assets is also one of many factors that shapes the economy. 

Workers today have trillions of dollars socked away in retirement accounts, Bostic noted. This wealth, in turn, provides both a source of future spending power to fuel economic growth and a potential driver of inflation. 

“In that sense, it was super interesting to see how retirement dynamics evolved during the COVID-19 pandemic period,” Bostic observed. “As you probably know, retirement dynamics changed very significantly during the acute period of the pandemic. A lot of people opted for retirement earlier than they might have otherwise.”

This retirement surge was “fairly disruptive” in terms of economists’ views about the true size and health of the U.S. labor force, Bostic said. It also sparked big questions about whether any of those people who left the workforce earlier than expected would want to (or need to) rejoin the labor force in the future.

“We have been very closely watching the situation and wondering whether labor supply will rebound to its pre-pandemic levels,” Bostic said. “Fortunately, it appears that retirement rates are slowly reverting closer back to their normal dynamics, which is good to see.”

A Word to the Wise

With respect to the professional financial advisor community, Bostic said, “retirement” is all about ensuring clients have enough wealth saved to have a dignified life once the regular paychecks stop coming in.

“There’s a huge variation in preparedness across the U.S. population,” Bostic said, noting that even high-earning Americans can struggle to stay on track without consistent advice and support. “Advisors can do a lot to get people on the right path.”

They can do so by helping to build sustainable portfolios and encouraging people to live within their means, Bostic said, but perhaps the most important thing advisors can do is help encourage the general public to get started on saving for retirement as early as possible. This is something Bostic does himself with the employees of the Atlanta Fed.