What’s the most overused phrase in the English language?
Here’s a vote for “the new normal.”
(“At the end of the day” runs a close second.)
Pundits talk endlessly about “the new normal” in healthcare, politics, foreign relations, sexuality, the climate, the workplace—you name it.
One exception is the financial world where I’m seeing a swing back towards “the old normal.”
In the old normal, you got paid for letting other people borrow your money. (That’s really what’s going on when we deposit our money in banks or buy bonds, either from the federal government or from a local municipality.)
We lend our money to these institutions, and they promise to pay it back at a future date. Along the way, they pay us interest for the privilege of using our money.
For most of the 20th century, most people put their money in banks or bought bonds. Maybe they bought a certificate of deposit (CD) which paid interest of 5% per year. Or they invested in U.S. government bonds paying 6%. Or they put their money in a bond issued by a blue-chip Fortune 500 company, paying 7%.
The income was predictable, and the principal was safe.
Then came 2000. A new millennium with new ways of thinking. And—you guessed it—”a new normal.”
Following the dot-com stock market crash of 2000-2002 (and again after the financial crisis of 2008), the Federal Reserve realized, “We can lower interest rates and stimulate the economy back to life.” That became a go-to strategy.
Of course, this was done on the backs of conservative investors. After saving for a lifetime—and counting on their bank accounts and bonds to earn decent rates of interest—retirees found that the Fed had pulled the rug out from under them.
In 2020, when COVID hit, the Fed had its “stimulus” playbook ready again. They pushed rates down to near zero. But this time, they got an unexpected result. The economy flamed out of control. Suddenly we were engulfed in runaway inflation!
“What?” everyone moaned. “We thought inflation died back in the 80s—along with parachute pants! We thought ‘the new normal’ was inflation-proof!”
We thought wrong.
The Fed stepped in. To try to slam the brakes on inflation, they raised interest rates. Repeatedly and dramatically. Rates jumped from near zero in January to over 4% today and may be (may be) on the way to 6%. We’ll see.
Consequently, many retirees are waking up, not to a new normal, but to an old one.
The spike in interest rates may have hurt their bond investments—but it also created new opportunities.
For example: Let’s say that before this latest downturn, I had $1,000,000 in assets paying me a meager 1% interest–or $10,000 annually. Now, if I have $850,000 (I lost some money, remember?), but I can earn 4%, I’ll make $34,000 in interest!
In short, less money + higher interest rates = more income!
I’m embracing this return to “the old normal.” It may not last long, but I’m going to squeeze as much lemonade out of this lemon-y economy as I can.
If you’re a retiree (or within 15 years of retirement), things have changed. Given today’s new (old) realities, it may be time to recalibrate.
When you do, you may find the old normal isn’t so bad after all.
To help you think through such issues, I’ve created a comprehensive checklist of pre-retirement questions for people who are 60-something. It’s free if you’d like a copy. Email me at bmoore@argentadvisors.com, and I’ll send it to you right away.
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