What Every Canadian Retiree Needs to Know About Rising Interest Rates

Retirees are in the sweet spot right now, with higher interest rates driving up interest income on fixed income investments.

| More on:
Retirees sip their morning coffee outside.

Source: Getty Images

Rising interest rates in Canada have put a damper on economic growth and consumer spending. They’ve hit all companies in all industries in one way or another. But there is a silver lining – if you’re a retiree, that is.

Let’s explore the collateral damage and opportunities.

Retirees: You’re in the right place at the right time

I’ll get into some of the negative consequences of the Bank of Canada raising interest rates later. For now, I’d like to focus on retirees, and the wonderful consequence that affects you most directly – higher interest income.

Usually, retirees are past the high-debt years of their lives. For example, mortgages have been paid off, and as the big spending years are in the rear-view mirror, all other types of debt are either also paid off entirely or in part. This leaves retirees well positioned to fully reap the rewards of higher interest rates.

For years, the biggest problem that retirees had was finding a reasonable interest rate on fixed income investments. Because while you should definitely always reserve a portion of your portfolio for equities,  fixed income investments at this stage are crucial.

Thankfully, now you can actually earn a decent rate on a guaranteed investment certificate (GIC), for example. It’s a 100% safe, no-risk investment that’s now yielding north of 5% at most Canadian banks. This is a far cry from the yields of well below 2% not too long ago.

Higher rates in action

To illustrate the difference this makes, I would like to go through a quick example. Suppose that you have $100,000 in retirement savings invested in GICs. If we assume they are yielding 1.8%, you would receive $1,800 in annual interest income. Now let’s assume they’re yielding 5%. In this case, you would receive $5,000 in annual income. If you have $500,000 invested in a 5% GIC, your annual income would be $25,000 (versus $9,000 at 1.8%).

As you can see, this is game-changing.

Beware of stock market volatility as rates increase

Contrary to the positive effect that rising interest rates have on interest earned on fixed income investments such as GICs and bonds, they have a negative effect on stock markets. This is because they result in lower economic growth but also because of the present value of money.

Stocks are valued based on the present value of future cash flows. The formula is as follows:

Bank of canada interest rates

As you can see, as the interest rate, or r, increases, the present value will decrease. This means that stocks will decline in value. This is the theory. And in practice it does work out this way, in general.

As a retiree, try to stick with those stocks that have growing dividends, defensive businesses, and solid balance sheets to weather the storm of rising rates. This will minimize your downside, yet still leave you exposed to dividend income, dividend growth, and finally capital appreciation when the stock price comes back.

A good example of this type of stock is Fortis Inc. (TSX:FTS). I’ve written a lot about Fortis stock, as this is a stock with a 50-year history of dividend growth and shareholder value creation. It’s also a stock that has been quite predicable over time. Its utility businesses, which are regulated, essentially guarantee this.

Fortis’ latest quarter was another very strong one, coming in ahead of expectations and showing healthy growth. In fact, adjusted EPS increased 18% to $0.84 and operating cash flow of $940 million was up 48%. This result was ahead of expectations that were calling for EPS of $0.81.

These are the types of stocks to be invested in at times of rising interest rates. They are the ones that will be good preservers of your capital.              

The bottom line

Canadian retirees are in the sweet spot right now. Take advantage of the Bank of Canada’s higher interest rates by nabbing some attractive bond yields. But also, remain invested in the stock market. Do this by focusing your holdings on strong and safe stocks like Fortis.    

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Karen Thomas has no position in any of the stocks mentioned. The Motley Fool recommends Fortis. The Motley Fool has a disclosure policy.

More on Dividend Stocks

calculate and analyze stock
Dividend Stocks

This 4.4% Dividend Stock Pays Cash Every Single Month

This high-quality Canadian dividend stock offers an attractive yield and plenty of long-term growth potential.

Read more »

edit Safe pig, protect money
Dividend Stocks

3 TSX Dividend Aristocrats That Can Weather Any Economic Storm

Market volatility has investors wondering which stocks can withstand an economic storm. Here are three to consider today.

Read more »

people relax on mountain ledge
Dividend Stocks

Top Canadian Stocks to Buy for Passive Income 

Are you building a passive income portfolio that can beat inflation and provide higher purchasing power? You could consider buying…

Read more »

voice-recognition-talking-to-a-smartphone
Dividend Stocks

1 Magnificent Canadian Dividend Stock Down 40 Percent to Buy and Hold Forever

This magnificent Canadian dividend stock trades at a huge discount, offers stellar growth, and pays one of the best yields…

Read more »

A plant grows from coins.
Dividend Stocks

Top Canadian Stocks to Buy for Dividend Growth

Dividend growth stocks can be a good option to build a passive income that beats inflation and improves buying power.

Read more »

Concept of multiple streams of income
Top TSX Stocks

The Best Stocks to Invest $1,000 in Right Now

Here are some of the best stocks that every investor should own today to generate massive income and strong growth…

Read more »

The TFSA is a powerful savings vehicle for Canadians who are saving for retirement.
Dividend Stocks

Trump’s Tariffs Could Hurt Your TFSA – But These 2 Stocks Will Keep it Safe

Worried about tariffs coming down? Then consider these two stocks to keep your portfolio safe.

Read more »

concept of real estate evaluation
Dividend Stocks

3 Top Real Estate Sector Stocks for Canadian Investors in 2025 

The Canadian real estate sector could see modest growth in 2025, but its long-term secular demand remains intact.

Read more »