My imaginary friend Riley picked at his dinner. He was agitated. The human manifestation of my Life of Riley Index, he’s usually a relaxed fellow. He likes a good margarita. He enjoys a diet that ensures full employment for cardiologists. He doesn’t take much seriously. Particularly himself.
When asked, “What do you do?” by someone in the work- and- career-obsessed world, Riley answers with a quizzical look.
“In the event of what?”
Riley, you see, doesn’t just avoid work. He eschews it. That takes not working to a whole other level. He will happily tell you that he is a rentier. He is a person who lives on rents and other forms of investment income.
Way better than enduring the indignity of work.
What makes Riley different from all the big money rentiers is that he lives modestly. He’s happy with an income that will put him comfortably ahead of most people. His actual target is an income at the 75th percentile of all households — more than most, but not enough to be noticed. He will never own a mega yacht that consumes as much energy as a small country. He’ll just be comfortable.
“So what’s bothering you?” I asked.
“Interest rates. Most people see lower interest rates as the silver lining of any economic cloud. For me, it’s the opposite. Lower interest rates are the cloud that may force me to sell the family silver.”
Riley is talking about the likelihood that the Federal Reserve will lower interest rates at its much-anticipated meeting later this month.
“Remember the good old days? Back in 2000 the stock market was yielding a tad over 1%. The bond market was at a juicy 6.15%. So a 50-50 portfolio of stocks and bonds yielded 3.65%. It could produce the kind of income I need — $55,225 at the time — with only $1.5 million in investments.
“Two decades later, in 2020, inflation caused my required income to hit nearly $88,000. But stock and bond yields were far lower. That raised the capital needed to a record $7.7 million. That’s a 500% increase in 20 years.
“Since then, interest rates have risen. So the amount of money required has been cut in half.
“In half,” he repeated with a smile.
“When interest rates peaked in spring, that 50/50 portfolio was yielding about 3%. Inflation had slowed. The required income wasn’t rising very fast. That took the required investment money down to about $3.5 million.”
“So what’s the problem?” I asked.
“Just this. If the Federal Reserve reduces interest rates much, I’ll be back to needing a bigger fortune faster than Californians are moving to Texas.”
A little data digging tells us why my imaginary friend is worried. While the Petty Patty’s of immediate analysis talk about the itsy-bitsy details of monthly inflation, citing the downward trend, the long history of victorious skirmishes should not be confused with winning the everlasting war on inflation.
Here are some examples from the annual Matrix book put out by Dimensional Fund Advisors:
- Despite deflation between 1926 and the end of 1943, the inflation rate between 1926 and 2023 ran at a compound annual rate of 2.9%.
- In the entire postwar period, 1950 thru 2023, inflation ran at a compound annual rate of 3.5%.
- The lowest long-term inflation rate for any of the 33 time periods from 1991 to the present is 2.5 percent.
But Riley is more concerned with his wallet than history.
“Let’s get real,” he tells me.
“Right now, the yield on a 5-year Treasury is around 3.71%. That’s down from the 4.72% peak in April. Nearly a whole percentage point.
“If stock yields stay about the same and interest rates go to, say, 2.5%, my 50/50 portfolio yield will drop to about 2%. That would increase the portfolio needed to provide $106,000 in income to the level it was in 2019.
“That’s over $5 million.”
The table below shows the numbers in historical context.
I came away from dinner wondering why the talking heads on TV never mention that interest rate changes are a zero-sum game. If rates rise, those who lend and save do well. Borrowers hurt. If rates fall, lenders and savers feel the pain. Borrowers celebrate.
“Wouldn’t it mean you’d also need a lot more money to retire?” I asked.
“You can’t retire if you’ve never worked,” Riley shrugged.
