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June 28, 2020
The term “fixed income” can be confusing. Many adults of all ages have a reasonably steady income, whether from a salaried work position or dependable work at an hourly job. But a fixed income, at least as it applies to budgeting and investing for retirement, is something different.
A fixed retirement income might sound great now, but you need to know all of the risks before you invest. Another confusing factor is the idea that a fixed income might not be good. You’ve probably heard commercials about people living on a fixed income, and how that seems to imply meager funds. But that’s not the whole story, either.
The major financial information providers all have slightly different fixed income definitions, which adds to the confusion.
However, all of these definitions mostly refer to fixed income investments and not the more general concept of fixed income for retirement.
You need to know what fixed income is because your retirement might revolve around it one day.
When you are working, you always have the possibility of earning more money – your salary could increase and you are continuing to work – increasing your overall wealth.
When you retire, you are living off of a fixed amount of resources. You will not have more money after you retire from any sources other than investment returns and most people do not earn much in investment returns and are instead drawing down their assets.
Retirement – for most people – means living on a fixed income.
Most retirement income sources are fixed since you are not earning more and adding to your assets – other than the lucky few earning interest or other returns on investments.
Fixed income investments are investments where you are not guessing about your investment returns, but you are predicting them. There are many different kinds of fixed income investing, such as:
One of the most important elements of a fixed income is that the amount you receive is something that you can generally count on. This could be any source of income that gives you a reliable return, often from an investment of some type.
For some people, a fixed income might also mean living on Social Security benefits. This isn’t ideal, but NPR explains that nearly half of all single retirees count on their benefits as a sole source of income.
Regardless of the source, living on a fixed income means that this month doesn’t vary, at least not by much, from last month or from the months yet to come. A downside to this could be the potential for inflation happening faster than the fixed income source can keep up with it. And in some situations, such as certain annuities that don’t adjust for inflation, the income is truly fixed, even when the price of everything else goes up.
The other element of a fixed income is that it arrives at a regular, dependable time. This might be monthly, as in the case of Social Security or some investments. Investing Answers describes this type of investment as one that gives the owner a fixed-rate annual yield, paid out quarterly or at another fixed interval.
Some fixed income annuities give investors a little more freedom with setting the income interval. For example, you could set up your income stream to arrive quarterly or even annually, depending on which type of annuity you purchased.
The appeal of a fixed stream of income is the reasonably low amount of risk, and the comfort in knowing that you won’t have to worry about how much you’ll receive, or when it will arrive. Even if it’s less than you’d hoped for, you’ll always know that on a certain date, the income that you need will arrive.
The draw that a fixed income has for some investors isn’t without other risks. For example, if you own a bond and decide to sell it, Fidelity Investments warns that you could find yourself with a loss or a gain, depending on the current interest rate.
In an extreme circumstance, some bonds might not pay out or might stop paying out if the issuer can’t continue. Treasury bonds carry the least risk of all, so they’re worth considering. Even if the dividends might be lower, the security can mean a lot.
Inflation is an ever-present risk with nearly any fixed income. But another way to help mitigate it is purchasing a U.S. Treasury Inflation-Protected bond, according to Fidelity Investments. There are other risks with bonds and other investments, but your retirement planner can help you learn about which ones affect your plans.
The real trick of a reliable retirement plan is to guarantee adequate retirement income to cover your retirement expenses.
Living on a fixed income isn’t necessarily a good thing or a bad thing. It’s just reliable retirement income with parameters that help you understand how it fits into your overall plans. Diversification is what helps give you a healthier portfolio and a more reliable income after you retire.
NewRetirement is committed to helping you prepare now so that you can enjoy the life that you want later. Our retirement calculator is a great place to start. Just enter your information and we’ll show you where you stand and where you need to be. There’s no cost, but the reward could be a retirement with fewer worries.
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