Barely a year and a half ago, the Fed fund rate for overnight lending stood at (annualized) 0.08%. Now it is between 5.25% and 5.50%.

This has tremendous positive implications for retirees who need a steady fixed income. Imagine that you are someone who has accumulated $1mm for retirement. If you didn’t want to take any risks and you invested your entire nest egg in the Fed fund (not that this is even possible), you would have a grand total of $800 a year! That’s why a year and a half ago, I had to expose my clients’ money to stock market risk, duration risk and interest rate risk just to earn some real returns. 

Then the Fed realized that inflation was out of control, and geopolitically the US needed to defend against de-dollarization, so since the middle of 2022, it has driven the Fed fund rate up. At the current upper rate of 5.5%, a $1mm investment will earn one $55,000 in totally safe interest income. $55,000 vs $800 – that is quite a difference! Who would have thought fighting inflation would be a blessing for retirees on fixed incomes? 

Of course, no individual retiree (or investor for that matter) can invest in the Fed fund, rather they can invest in various money market instruments and treasuries. The chart below shows where the sweetest spot lies.

The X-axis shows the maturity time of various Treasury instruments, the Y-axis shows the corresponding yield an investor can earn. From the chart, one can see the sweetest spot is the 4M (4-month) Treasury Bill: If you buy a 4M Bill, you will earn a 5.6% annualized return! This is so high because there might be a little bit of default risk involved. This is due to another budget fight between the Administration and Congress.

Overall, all the yields below 1Y (1 year) look very sweet (around 5.5%.) To earn these yields, you can either open a Treasury Direct account and buy individual Treasury Bills shorter than 1 year, or you can invest in a low-cost money market fund or an ultra-short term bond fund. If you would like to know more about how to do that, feel free to schedule a consultation with me.

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