Most headlines treat interest rate cuts as universally good news, but if you're retired or planning to retire soon, lower rates can quietly take money out of your pocket.
 

Many retirees depend on conservative investments like GICs and bonds to produce income. When rates fall, so does the return from these savings, but your lifestyle costs likely haven’t changed and that means you may have to spend down principal, reduce your spending, or take on more risk.
 

Economist Moshe Lander explained the logic behind potential rate cuts this year. “It does look more likely that we're going to see a rate cut when the Bank of Canada meets next month. Now, with the unemployment numbers rising, the economy was experiencing negative growth. So it doesn't mean we have a recession yet, but we're on our way. An interest rate cut would seem the appropriate thing to do at this point.”
 

The Bank of Canada’s goal is to try to revive economic activity before things get worse. A cut of 25 basis points would make borrowing cheaper for businesses and consumers, encouraging more investment and spending.
 

How Rate Cuts Redistribute Wealth Away from Retirees
 

“If you have a large pile of debt, especially if it’s tied to some sort of adjustable rate, then with an interest rate cut, your debt servicing portion has gone down,” Lander explained. “But at the same time, if you are a saver... then what you're saving with one hand, you're giving back with the other.”

And if you’re retired, chances are you don’t have much debt, you’ve paid down your mortgage, you’re living within your means, and you’re drawing income from your investments. That makes you a pure saver.
 

Retirees, who are typically net savers, can lose income, even as the broader economy tries to regain momentum.  Faisal put it simply: “If you’re in retirement, is a rate cut good news? Not necessarily. It means your income from GICs, and fixed income just went down. Again.”
 

The Bigger Picture: Lower Income Means Lower Spending
 

The paradox here is that by lowering rates to encourage spending, the Bank may inadvertently be forcing retirees who control significant wealth in Canada to pull back even more. That can slow growth further and contribute to the very downturn the policy is meant to avoid.
 

Leanna Wachniak pointed out, “if you're saving, you just took an income cut too.” That can translate directly into reduced lifestyle spending. Moshe Lander added that this impact can stretch beyond individual portfolios. “If you have to save more, then you have to spend less. Every extra dollar that you're saving is one less dollar that you're spending. And given that consumers make up about two thirds of Canadian GDP, small changes can add up. When Canada is only growing at best one to one and a half percent per year, that can be the difference between mild growth and a mild recession.”
 

The Long-Term Risk: Chasing Yield or Cutting Back
 

Another consequence of falling rates is that some retirees may feel forced to “chase yield” or dividends shifting money from safe investments into higher-risk options in search of better returns.
 

Moshe touched on this indirectly by explaining how reduced savings can delay investment: “Saving is essentially the supply of financial capital. If you're finding that coming up with that saving is more difficult... that does have consequences, then in the ability for investment demand to take place.”
 

On an individual level, if you can’t safely generate enough income, your options shrink: you either take more risk or you reduce your spending. For someone in retirement, neither is ideal.
 

Moshe Lander stated, “fundamentally, it's the first law of finance, right? No risk, no reward. And so if you're finding that the reward is harder to come by, then you have to take on a higher risk to do it. If there were a way that you could get that higher return without taking on the risk, why weren't you doing that in the first place? You weren't being efficient with your investment capital. So it's absolutely true that if you're going to have to now chase return to make up for what you've lost, you do have to increase the risk ladder.”
 

What Can You Do?
 

If you rely on investment income to support your lifestyle, now is the time to connect with a financial advisor and revisit your plan. Then you can:

 

1. Assess how much of your retirement funding is tied to interest rates.
2. Find out if your portfolio generate the income you need if rates fall further. Then stress test your income plan against even lower returns.
3. Find out if you are too concentrated in fixed-income investments. Reconsider the balance between safety and growth in your portfolio.
4. Explore more tax-efficient ways to generate income.

Interest rate cuts are designed to lift the economy, but as mentioned they often shift wealth from savers to borrowers in the process. If you're in or near retirement understanding that shift, and adjusting your strategy accordingly, is key to helping protect your financial independence.  Contact us today and we can look over your portfolio.