Savers are about to face the most significant financial challenge of all – the challenge of self-discipline.

Short term interest rates are dropping. Short-term 6-month T-bill rates have already fallen significantly below 4%, down from a high of 4.75% one year ago this month, and 5.5% two years ago. Expect CD rates to follow quickly.

If you were planning to live on the interest you earned, it’s time to revise your budget – not your asset allocation. And that’s where self-discipline comes in.

It was pretty easy to sit on the sidelines of a roaring stock market when you were earning well over 4% on safe “chicken money” investments such as short-term CDs, T-bills, and even money market accounts. You had set aside an appropriate portion of your financial assets in these boring but safe investments that let you sleep at night.

After all, the definition of “chicken money” is money you cannot afford to lose. So, you take no risks – no AI or chip stock purchases, no promised higher yields on real estate or oil deals, no speculation on crypto. At least, not with your chicken money. That sits safely on the sidelines in guaranteed safe, liquid, interest-bearing short-term accounts.

That peace of mind allows you to invest another portion of your retirement funds in well-chosen growth opportunities – individual stocks or mutual funds. You know that strategy makes sense over the long run, since there has never been a 20-year period when you would have lost money in a diversified stock portfolio with dividends reinvested. That’s why the S&P 500 stock index is the core of every retirement portfolio – a larger portion in your earlier accumulation years, and less but still some exposure during retirement.

Chicken Money Squawks
But now, keeping some of your nest egg safe is about to get painful. As rates fall, incomes fall. That tends to hit seniors even harder than most. Suddenly the direct-deposit of interest from your T-bill account or the new rate as your CD rolls over leave you less spendable income – just at the time you need it most.

It is exactly at this time you most need to remember the mantra of the chicken money investor:
I’m not so concerned about the return ON my money, as I am about the return OF my money!

The temptation to find alternative investments will become more compelling than ever if rates continue to slide. And the financial salespeople will be calling to take advantage of your need for income.

They’ll talk you into annuities, with promises of higher rates. You’ll fool yourself into thinking you can afford to tie the money up for years, and won’t need to pay the penalty for early withdrawal – but can you be sure?

They’ll offer “alternative investments” – everything from “private credit” to promised higher yields on special deals in real estate, energy, solar, and crypto. It happens every time. And it catches some people every time – typically people who can least afford to lose a chunk of their retirement money.

How Low Can Rates Go?
From 2010 through most of 2015, 6-month T-bills yielded less than half of one percent, at times dipping to just 0.03%. Again in 2020-2022, during the Covid pandemic, 6-month T-bill rates dipped as low as 0.06% — and stayed below 0.25% for two years as investors rushed to the safety of U.S. short-term debt, pushing rates down.

In fact, during the earlier period, when current Fed Chairman Jerome Powell was just a member of the Federal Reserve Board of Governors, I had the opportunity to question him at a press conference. I noted that European banks were paying negative interest at the time. That is, depositors were willing to pay the banks just to hold their money and keep it safe.

I asked Mr. Powell if T-bill rates in the United States could “go negative.” He fixed me with a steely stare and replied that was not going to happen!

But still, for many years savers with chicken money earned almost no interest. They had to be content knowing their money was safe – the return OF their money. They couldn’t live on their interest, but instead might have had to dip into principal when money was needed.

No one knows how low interest rates could go this time around. Inflation may return, pushing rates higher despite all the Fed’s efforts to bring them down. Or an economic slowdown could reduce the demand for borrowing, keeping rates lower. A global calamity could create a surge of demand for U.S. dollar investments, pushing rates down.

But despite low rates, you’d still have your chicken money. That’s the point of setting it aside: safety while everything else is volatile and uncertain. The trick is having the discipline to stick with your allocation to safety, even when you aren’t getting a great immediate reward in high interest rates.

In fact, that’s when you need your chicken money the most. And that’s The Savage Truth.