The term 'fixed income' can be confusing. Many adults of all ages have a fairly steady income, whether they are employed or work reliably hourly. But a steady income, at least when it comes to budgeting and investing for retirement, is something else.
A steady retirement income may sound good now, but you need to understand all the risks before investing. Another distorting factor is the idea that a fixed income may not be a good thing. You've probably heard commercials about people living on a fixed income and how they seem to do so with meager resources. But that's not the whole story.
Definitions of Fixed Income
The major financial information providers all have slightly different definitions of fixed income, which only adds to the confusion.
- OfGoogledefinition is: “an income from a pension or investment that is set at a fixed amount and does not vary (like a dividend) or increase with inflation.”
- Investopediasays: “Fixed income broadly refers to those types of investment guarantees that pay investors a fixed interest rate or dividend payments until theymaturitydatum."
- Wikipediaputs it another way: "Fixed income refers to any type of investment in which the borrower or issuer is required to pay a fixed amount on a fixed schedule. For example, the borrower may be required to pay a fixed interest rate once a month." years and repay the principal amount on the due date."
But all these definitions usually refer to fixed income investments and not to the more general concept of fixed income for pensions.
What is a fixed income? Why do you need to know this for your pension?
You need to know what fixed income is because your retirement may one day require it.
When you work, you always have the opportunity to earn more money – your salary can increase and you continue to work – increasing your total wealth.
When you retire, you live on a fixed amount of resources. You won't have any money in retirement from sources other than investment returns, and most people don't earn much from investment returns and instead deplete their assets.
Retirement means – for most people – living on a fixed income.
Define fixed sources of income for your pension
Most sources of retirement income are stuck because you're not earning more and growing your wealth - except for the lucky few who earn interest or other returns on investments.
- Your Social Security payments may go up (or down) for cost-of-living adjustments, but once you start taking Social Security, your monthly payments are fixed.
- Pensions are like Social Security and are also considered fixed income.
- Annuities provide a steady income and are a good way to ensure you don't run out of money in retirement.
- There are many types of fixed income investments that can be used for your retirement.
What is a fixed income investment?
Fixed income investments are investments where you do not gamble, but predict your investment returns. There are many different types of fixed income investments, such as:
- Fixed rate annuities
- Fixed income funds
- Fixed Income ETFs
- Fixed income securities
- The interest rate derivative
- and more…
What is a fixed income? What are the characteristics, advantages and disadvantages of fixed income securities?
1. Income that does not vary, at least not much
One of the most important elements of a fixed income is that you can usually count on the amount you receive. This can be any source of income that gives you a reliable return, often from some kind of investment.
For some people, a fixed income can also mean living on benefits. However, this is not idealNPRexplains that almost half of all single retirees consider their benefits as their only source of income.
Regardless of the source, living on a fixed income means that this month is not, at least not much, different from the previous month or the months to come. A disadvantage of this could be that inflation can occur faster than the fixed income source can keep up with. And in some situations, such as certain annuities that don't adjust for inflation, income is effectively fixed even as the price of everything else rises.
2. A stable income comes at regular intervals
The other element of a steady income is that it comes at a regular, reliable time. This can be monthly, such as with social security or some investments. Investment Answers describes this type of investment as one that provides the owner with a fixed annual return, paid quarterly or at some other fixed interval.
Some fixed-rate annuities give investors a little more freedom in determining income ranges. For example, you can schedule your income stream to arrive quarterly or even annually, depending on the type of annuity you purchased.
The appeal of a fixed income income stream is the fairly low risk and the comfort of knowing you don't have to worry about how much you'll receive or when it will arrive. Even if it is less than you had hoped, you always know that the necessary income will arrive on a certain date.
3. Fixed income securities entail a number of avoidable risks
The appeal that fixed income has for some investors is not without other risks. For example, if you own a bond and decide to sell it,The Fidelity Investmentwarns that you could make a loss or a profit depending on the current interest rate.
In extreme cases, some bonds may not pay or stop paying if the issuer is unable to continue. Government bonds carry the least risk and are therefore worth considering. Although the yield may be lower, the safety can mean a lot.
Inflation is an ever-present risk with almost any fixed-income income. But another way to mitigate this is to buy an inflation-protected U.S. Treasury bond, according to Fidelity Investments. There are other risks associated with bonds and other investments, but your retirement planner can help you figure out which ones will affect your plans.
How do you arrange a sufficiently fixed income for your pension?
The real trick to a reliable retirement plan is ensuring enough retirement income to cover your retirement costs.
Living on a fixed income isn't necessarily a good or a bad thing. It's simply reliable retirement income with parameters that help you understand how it fits into your overall plans. Diversification gives you a healthier portfolio and more reliable income in retirement.
Nypensionis committed to helping you prepare now so you can enjoy the life you want later. Uspension calculatoris a good place to start. Simply fill in your details and we will show you where you are and where you need to be. There are no costs involved, but the reward can be a worry-free retirement.
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