Unlike higher gas prices, which hurt almost everyone, higher borrowing costs have an uneven impact

Rising interest rates can upend the finances of some seniors.

In September 2024, Donald Trump, then the Republican nominee for president, promised: "We're going to put a temporary cap on credit-card interest rates ... at around 10%." Yet today, the Bankrate Monitor National Index shows the average credit-card APR at a historically elevated 19.6%.

Mortgage rates are also at levels not seen since the turn of the century. Those numbers are only likely to rise, as these and other interest rates often increase within a few months of hikes in the federal-funds rate - like the one that just happened last month.

Unlike higher gas prices, which hurt almost everyone, higher borrowing costs have a mixed impact - especially for older Americans. People with credit-card debt suffer. But a higher federal-funds rate also leads to higher returns on assets that retirees often hold. Given high government debt, the funding needs for the AI build-out and inflation fueled by the Iran war, interest rates are likely to remain high. It's worth a look at the various ways - good, bad and ugly - that high rates affect those near and in retirement.

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The good: Annuities and cash-like assets

Higher interest rates have a few clear benefits for those near and in retirement. For near-retirees who are considering annuitizing some of their wealth, higher rates are helpful. For example, the monthly payout for a $100,000 annuity bottomed out around $425 for a 65-year-old female when interest rates fell during the COVID-19 pandemic, and have rebounded to nearly $600 a month as rates have risen. Certainly, this impact could be good news for the admittedly small (but perhaps growing) number of people who use annuities.

A more common positive impact is for those who hold cash-like assets with interest rates that respond to the federal-funds rate: mainly, savings accounts, money-market accounts and short-term certificates of deposit. Roughly 3 in 5 Americans ages 55 and over hold at least some wealth in these assets, according to an analysis of the Survey of Consumer Finances. Still, those assets are usually a small part of older Americans' net worth - 3% to 4%, on average. So while rising interest rates can help here, it may not be a huge boon.

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The bad: Houses, bonds - and (maybe) 401(k)s

When people think of high interest rates, mortgage rates usually spring to mind. But since over 70% of people ages 55 and over already own their homes, it's natural to assume that mortgage rates don't affect them. Still, higher mortgage rates make it harder to unlock home equity by downsizing and moving to a place more amenable to retirement. For example, one study found that rises in interest rates postponed lifestyle moves to independent living communities for four to five years.

Aside from this effect, rising interest rates can also undermine certain assets held by retirees and those close to retirement. The most obvious type would be directly held bonds or bond mutual funds, whose prices tend to drop when interest rates rise. However, only about 6% of these households hold such assets.

Far more ubiquitous are bonds held indirectly, often through target-date funds in 401(k) accounts. Roughly half of households ages 55 to 64 have assets in a 401(k), and about a third of those balances are in target-date funds. Since these funds shift to bonds as people approach retirement, higher interest rates could reduce returns in many workers' 401(k)s.

Whether this happens depends a bit on how stock prices react to the higher rates - something that is more ambiguous. Still, it's worth keeping an eye on whether 401(k) returns decline at a crucial time for retirement savers. Then again, at least those with target-date funds have a pile of assets. The people really hurt by higher rates are those with a pile of debt.

The ugly: Big credit-card balances

The most vulnerable group to increasing interest rates are those who must deal with higher borrowing costs without much ability to increase their earnings. Many of these people are low income. Figure 1 below divides people ages 55 to 64 and those 65-plus into five roughly equal income groups, from low to high, and shows their credit-card debt divided by their income. A higher value indicates a higher debt burden relative to what can be afforded.

The figure shows that lower-income people have a higher debt burden than those with more money. On average, the poorest 20% of 55- to 64-year-olds (gray dashed line) hold credit-card debt equal to over 10% of their income. For those 65-plus, the number is 5% (gray solid line). The comparable numbers for the richest 20% are much lower, at around 1%.

The figure also highlights that some lower-income people are in real trouble. If you look within that poorest 20%, you'd see that 10% of people have credit-card balances worth over 20% of their income. For the richest 20%, that same number is below 5%. To the extent that recent and future federal-funds rate hikes spill over to credit cards, low-income people will be hit the hardest.

I've written in this space before about how the Trump administration's policies have either hurt the vulnerable or disproportionately helped the rich. While higher interest rates aren't a policy aim of the administration - indeed, the White House has agitated for lower rates - its policies have led to higher rates. By passing a large tax cut and following it up with a costly war, the U.S. debt-to-GDP ratio is at near-record highs despite an economic expansion.

Relief on interest rates likely isn't coming, and the ugly truth is that the most likely group to be hurt is already low income.

-Geoffrey Sanzenbacher