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What is a Fixed Income?

A secure and unchanging return on investment may be referred to as a fixed income.
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  • Written By: Tricia Ellis-Christensen
  • Edited By: O. Wallace
  • Last Modified Date: 21 October 2014
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A fixed income can have several definitions. It can be defined as a secure and unchanging rate on an investment. For example, some people purchase bonds, and derive a secure rate of income from them. This is generally a low interest rate on the bonds purchased, but it is additionally a guaranteed and static rate of return. Essentially any investment with a guaranteed rate of return is a fixed income.

Mostly when people hear this term, they’re inclined to think it refers to a pension payment or a social security income that is fixed to a specific amount. This is usually what people mean when they say they are on a fixed income. In other words, without making additional investments that would secure more income, or without working, the person receives only their pension or the social security income—sometimes both, so the income does not rise or fall.

As many of the elderly are finding, without a significant fixed income, living can get very challenging. The income doesn’t rise to accommodate rising prices. With people now living longer than ever before, a small income can make for a person gradually sinking into poverty and being unable to live in manner they're accustomed to. Simple things like the rise in the price of gasoline can significantly affect the person with the income, making it impossible or challenging to travel, or to even take small necessary trips to grocery stores or to doctor’s offices.

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This is why many financial advisors stress the importance of investments during your lifetime that will provide an income far above what might be needed at present. Prices of today can only be expected to rise, and it is unlikely that someone will be able to live comfortably on a fixed income that features only social security payments. To this end, many companies set up investment plans for their employees, such as 401ks or pension plans, and many people privately invest a portion of their funds to make living easier once they have retired.

Another type of fixed income could be referred to as a reverse fixed income. This is when you borrow money from a lender and promise to pay a certain amount each month, or on a regular payment schedule. The amount you promise to pay is set at a certain price, and unless the loan is re-negotiated, you are standing security for paying that set amount. In other words, the payment amount is “fixed” and you have made a secure promise to pay it as required.

A type of loan of this sort, such as a fixed interest mortgage rate on a house may prove to be an investment. If you are paying both principle and interest monthly on a home loan, you may actually get to keep a portion provided that real estate prices remain at the same level or increase. Therefore, though you are the person securing the loan and paying on it, it ultimately may be considered an investment that helps you when you do have a fixed income amount in retirement, since you could sell the home or mortgage to increase your income.

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cafe41
Post 5

@Latte31 - Wow what a great way to retire. I wanted to add that getting a reverse mortgage also allows for a fixed income for seniors. I believe you have to be of retirement age to apply and the way that it works is that you sign a reverse mortgage with the bank and they will pay you an annuity based on the equity in your home.

So instead of paying the bank, the bank is paying you a set amount per month. I did hear that there are a lot of fees associated with this type of arrangement and it may not be for everyone. This is a way to earn a fixed income from the equity in your home.

latte31
Post 4

@Bhutan - I have to say that I agree with what you said about bonds, but a lot of people like the tax free set income. For example, if you invested $1,000,000 in municipal bonds at a 5% yield you would earn an annual tax free income of $50,000. This is hard to beat.

I know that some people look toward the yields in dividend paying stocks too in order to live off of the dividends. My husband’s grandparents did this. They had a fixed income based on the dividend checks that they received in the mail. They invested in blue chip stocks and were able to retire quite comfortably.

Bhutan
Post 3

@Suntan12 - I agree that the nice thing about fixed income bonds like municipal bonds are that you receive interest free income, however these bonds are really risky right now.

These bonds tend to loan money to municipalities and most municipalities are bankrupt so a lot of people are staying away. They will offer a higher yield because they are a little riskier but you have to weigh your investment decisions carefully.

They say that general obligation bonds are better fixed income investments because these are the more conservative of all of the municipal bonds. The revenue bonds are the riskiest.

Also, bonds have an inverse relationship with interest rates. When the interest rates go up the bond prices will go down. Many financial advisors feel that interest rates will eventually go up because they are at their lowest right now. Bonds might lose value in the future because of this.

suntan12
Post 2

@Anon115354-I understand what you are saying, but I think when they use the term fixed income it means that the income will not fluctuate.

Although it may feel like your income is set, you do get increases and will get future increases but seniors that are living with a fixed income will not.

The income will stay the same regardless unless they get a job and work part time. This is why a lot of people get into fixed income investments especially when they are getting close to retirement.

They can sign up for a fixed annuity that promises a certain monthly income for the life of the annuity. Others look to invest in bonds. For example, municipal bonds offer tax free income for the term of the bond. These bonds usually offer a fixed income yield from 3% to 6%.

Because of the tax free earnings many people look toward these investments especially if they are in a high tax bracket or are in retirement.

anon115354
Post 1

I work full-time and generally get small cost-of-living raises of 1-4 percent (although these past two years salaries were frozen). Am I not already on a fixed income? I've never understood why retirees are singled out as "living on a fixed income" -- don't all wage earners do that?

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