There Is No King

With all due respect to Maria, how do you solve a problem like TINA? Because "she" is becoming a problem.

From a 5% return to nothing seemingly overnight.

If pictures are worth a thousand words, then the chart of the 10-year return on a hypothetical $10,000 in Vanguard Prime Money Market Fund should say it all. In 2006 and 2007, the fund was returning a generous 5% APR. In the eight following years, the fund earned less than 0.3% APR. In other words, stashing money under the mattress or burying in the front lawn legitimately may have had a better risk-adjusted return!

The Federal Reserve Bank (the "Fed") has kept its federal funds rate significantly less than 1% since December 2008. At that time, investors were so frightened by the markets that financial stability was its own incentive, so the funds did not need to offer a corresponding interest rate (because 0% APR is higher than any loss).

Consequently, the Fed left investors with no choice but to invest in stocks. As the markets plummeted, the good money acknowledged that it was far more probable that they would rise than continue falling and, without an interest rate yield, the opportunity costs were effectively eliminated. In other words, "there is no alternative" in which to invest than stocks (which was how TINA got her name).

Initially, the returns from stocks were fantastic with the market recovering in record time with the Dow returning to its pre-October 2008 levels in about a year and setting a new all-time high in March 2013. However, maintaining an artificially low interest rates has had its negative affects otherwise.

When I first started in finance, the known expectations for retirement planning was that stocks would get 9-11%, bonds would get 6-7%, and a cash position would get 2-3% (at times, falling below the pace of inflation).  Nowadays, the revised expectations place stocks getting 6-8%, bonds getting 4-5% and cash returning nothing.

Prime Money would return $250 on $11,000 over 8 years.

Therefore, anyone approaching retirement would need to review and likely revise their retirement plans because it would be too risky (in fact, foolhardy) to expect the old school returns in investments to be restored.  The difference in current returns in all investment classes is, across the board, effectively equal to the zeroed federal funds rate.

Whether the federal funds rate (or the recent regulation changes in Money Market Funds, which are required by October 2016) boosts the return of the Money Market Funds is almost irrelevant if the retirement plan is set to the worst case scenario, which is basically where the economy is right now. Because if you have planned for the worst, then anything else is an improvement -- and having more money in retirement than needed is hard to qualify as a problem.