High Interest Rates Aren’t All Bad  

 Let’s have an overdue cheer for higher interest rates!

 I’m serious. If you take the unending media whining on the latest adversity Americans face seriously, you’d think higher interest rates ranked with errant asteroids and bubonic plague.

They don’t.

Indeed, as a Solvent Senior, I’ve spent much of the current century wondering where the cash return on savings had gone. And wishing it would come back.

I know I wasn’t alone. If you are retired, or in the years approaching retirement, the notion of having savings that earn something is pretty important.

Good News for Some

Cash, many said, was trash. Today, cash is held in higher esteem. I’m glad. Millions of other savers who’ve seen their savings lose purchasing power year after year are glad, too.

Earning 5 percent on savings is a big deal. If you have savings and the savings earn interest, it means you have money to spend. That means a lot.

As I write this you can get about a 5 percent yield in a number of money market mutual funds. Almost forgotten during the many years of near zero yields on cash, money market mutual funds are funds whose daily value is kept at $1 a share. They invest in very short-term certificates of deposit, soon-to-mature Treasury and agency obligations, Treasury bills, etc.

You can also invest in an ETF (exchange-traded-fund) that specializes in Treasury obligations that mature in the very near future. This fund, iShares Short Term Treasury (ticker: SHV), doesn’t guarantee a constant $1 per share value, but its ups and downs are small. Also, its expense ratio is a fraction of what most money market mutual funds charge (see table below).

Not Such Good News for Others

To be sure, higher interest rates aren’t good for everyone. Wall Street complains because higher rates add risk to otherwise painless ways to make gobs of money by borrowing cheap and lending long. Ditto banks, including the ones no longer with us because they were too dumb to count.

It’s no fun for home buyers because the monthly cost of buying a home has soared well beyond the income of most would-be buyers. The best deal in America, ever, was being able to borrow money at an interest rate lower than the rate of inflation for the 30 years of a home mortgage.

That’s gone.

On the other hand, if you’re a Solvent Senior, higher yields may have transformed retirement from anxious to plausible for some. And to downright generous for others.

Measuring Higher Interest Rates in Required Minimum Distributions

One way to understand the improvement in retirement security is to compare a 5 percent yield against the required minimum distributions that we eventually have to start taking from retirement accounts. Now beginning at age 72 (up from 70 a few years ago), RMDs are disconcerting when the amount you must withdraw exceeds the income generated by the account.

And, until recently, that was every year, year after year after year.

Why are principal withdrawals a source of worry?

Easy.  Every dollar of withdrawal from principal means you have less money earning money. Remove principal routinely and you will, eventually, exhaust the account. (That’s what is supposed to happen, of course, but if it happens too soon, we’ll be broke at a very inconvenient time.)

As you can see from the table, with current interest rates over 5 percent, the yield on a money market mutual fund, alone, will generate enough interest income to pay 100 percent of required minimum distributions to age 81, before taking a dime of principal.

Related columns:

Scott Burns, “The Great American Bank Robbery,” 3/21/2010: https://scottburns.com/the-great-american-bank-robbery/

Sources and References:

Fidelity MMF data: https://fundresearch.fidelity.com/fund-screener/results/table/income- characteristics/minInitialInvAmount/asc/1?assetClass=MM&category=TF%2CTM%2CXT&order=assetClass%2Ccategory

Schwab MMF data: https://www.schwabassetmanagement.com/products/money-fund-yields

Vanguard MMF data: https://investor.vanguard.com/investment-products/list/mutual-funds?assetclass=money_market&investmentminimumclass=1-1000,1000-3000,3000-10000

iShares SHV data:  https://www.ishares.com/us/products/239466/ishares-short-treasury-bond-etf#/

Bankrate.com RMD figures: : https://www.bankrate.com/retirement/ira-rmd-table/

This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.

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(c) Scott Burns, 2023