What Is Fixed Income?

Fixed income is defined as an income from a pension or investment that is set at a particular figure and does not vary with the rate of inflation. This means that if an individual earns $100 a month in the year 2000 they will still earn $100 a month in 2020, regardless of what the economy does.  They do not have an option to work more hours or ask the boss for a raise. There are several examples of fixed income sources including Social Security, pensions and interest from bonds.

 

 

Many people over the age of 65 receive monthly payments from Social Security. This retirement benefit lasts until the individual dies. Social Security is not strictly a fixed income source as there is an annual adjustment for cost of living increases. However this adjustment may not actually be equal to the increase in the real cost of living. Changes in the economy can drastically reduce the buying power of the consumer and those on Social Security cannot just work a little harder to make up the difference. This is one of the major sources of income for many seniors.

 

 

Some individuals have a pension paid by a previous employer. The details of the pension will vary from one employer to another and may include cost of living increases. These pensions may be paid monthly, quarterly or annually according to the specific policy. Many individuals with a pension also receive benefits from Social Security, but the combination of these two incomes is still fixed.

 

 

Many individuals invest in a variety of financial instruments so they have a comfortable income when they retire. One of these options is commercial or government bonds. Bonds will pay a specific interest amount at regular intervals. This may mean quarterly or annually. This interest rate will not change so the amount of money received is always the same.

 

 

It can be difficult for individuals to live on a fixed income. As time passes the amount of money they receive purchases less and less. This will require setting a budget and finding ways to save. There are many ways to reduce expenses, but the first step is to keep a journal of all current spending. This allows individuals to identify areas where they are spending money that they may not be aware of. A single cup of coffee each morning when purchased for $2.50 may not seem like a lot, but over the course of a year this will cost over $900 per person. Once these expenditures are identified it becomes easier to control them. There are many resources available to help individuals living on a fixed income make their money go farther. There are seminars, books and online websites with tips and tricks.

 

It is important for working adults to plan for their retirement to avoid having to live on a fixed income for an extended period of time.  Investing in 401K, stocks, bonds, mutual funds and IRAs are all ways to eliminate this problem when individuals retire.