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Fixed Income Versus Variable Income In Retirement

What is a fixed income?

Pension income is a fixed income. Income from a bond portfolio is also considered a fixed income because it’s a debt product, you loaning money to an entity. Oh, and of course a savings or CD is considered a fixed income.

Essentially, any income stream that’s steady, passive, and doesn’t fluctuate in price is considered a fixed income. Also, it’s generally assumed that a fixed income loses its value over time due to the deleterious effects of inflation.

Most pensions are considered fixed incomes because they don’t have an inflation adjustment. My Kaiser Permanente pension (if I had vested in it), for example, pays me a percentage of the average of my 3 highest consecutive income years. The maximum I could get would be 45% of my salary, starting at age 65 and continuing on until I die.

Is Your Paycheck Fixed Income?

No. Your income is generally adjusted by your employer based on rise in cost of living (COLA = cost of living adjustment). They do this in order to attract new employees and to keep established ones.

Being an employee has the advantages of being offered bonuses, overtime pay, and being able to move from one job to a better paying one.

Is Social Security Income Fixed Income?

No. Your patients will whine and cry about the expensive urgent care visits that they can’t afford because they are on “a fixed income” by which they mean social security.

SS income adjusts with inflation. If prices go up by a lot due to inflation (when the dollar loses value) then those monthly SS checks will go up accordingly.

Is An Annuity A Fixed Income?

Yes.

Annuities became a 4-letter word for a few years when shady salespersons were selling the wrong kind to the wrong clients. A few insurance groups who issued them also went out of business, which didn’t help their cause. But it has, for the most part, regained its value in the financial planning realm.

An annuity comes in many shapes and sizes but a simple way of explaining it is that it’s a lump sum of money which you turn over to an insurance company who in turn gives you a fixed monthly paycheck from it.

There are many ways of structuring your annuity, however, you’ll get the highest monthly checks if you opt out of costly options such as having it adjusted for inflation. Variable annuities are tough to make a case for – fixed annuities seem to be the best option when they are called for.

Fixed Income Through A Securities Portfolio

Another way of creating a fixed income stream is through securities – bonds, specifically. A bond is a loan that you make out to a company or government. This entity will tell you when the money will be returned (the term or maturity date) and what percentage they will pay you for it (interest rate or coupon).

 

Retirement & Fixed Income

In the US it seems to be a popular sentiment that once you retire you live on a fixed income. This of course is seen as unfavorable because who wants to have their spending power cut by inflation or rise cost of living otherwise?

Fixed Income Can Work

A fixed income portfolio or retirement strategy can work as long as some room for inflation is built into it. If a couple needs $4,000/month to live on then it would make sense to plan for around $6,500/month of income.

Of course, it also depends how much of this portfolio is from social security income which isn’t a fixed income, as we discussed.

Inflation risk can be slightly mitigated as well by building a bond ladder. There are other advantages to having a bond ladder, you can read up on that if interested. Designing your own bond ladder is a better idea than trying to pay for a “pre-built” one which will be sold at a premium.

 

Avoiding A Fixed Income In Retirement

The notion that when you retire you won’t have any wiggle room in your spending is wrong. If you have been reading current financial planning strategies, there is a big push to avoid fixed income.

You see, equities (stocks) are one way of avoiding the whole fixed income problem. It’s not the only one but I don’t want to digress like I normally do. From reading this blog you should be familiar with all the different income generating streams that I think a healthcare professional should have during retirement:

  • income from work you enjoy doing
  • a business
  • real estate
  • bonds
  • cash equivalents (CD’s)
  • equities
  • budgeting (yeap, it’s a form of income)

 

Is Variable Income Good?

The opposite of a fixed income is variable income, meaning, an income which changes with the economy or due to how much effort/time you invest in it.

Stocks (equities) are a form of non-fixed income. Investing your money in equities will offer you dividend returns as well income from appreciation. The downside, of course, would be that you could also experience a loss in income/value when the economic performs poorly.

If you start a business then your income would also be variable. Depending on how much effort and resources you put into the business, it would dictate your income from it.

A side-job, part-time job, or moonlighting gig would be a fantastic way to bring in a little variable income when needed. This will help your portfolio maintain its value during tougher economic times. A side-income is perhaps the most powerful method I can think of for a healthcare professional to fight inflation.

 

Variable Income Strategies

Adding variable income will diversify your portfolio. It will decrease the risk of your portfolio and increase the chance that your portfolio will last longer and provide a higher long-term return.

That’s 3 benefits, all from adding in some diversification. Incredible.

A fixed income strategy can certainly work if you have incredible control over your spending. But by itself it can be a bit of a weak retirement strategy and lead to unnecessary fears.

Equities Portfolio

By having even 50% of your portfolio in equities, you can ensure that you take advantage of the ups and downs of the market. You can invest in broad equities index funds or fund of funds.

Most years such a portfolio will offer positive returns and always offer a dividend income. During the years when it’s down, you can still profit from the dividends and avoid selling any depreciated funds by either utilizing your fixed income or use any of the next few variable income strategies.

Real Estate Income

If you have a home with adequate room, you could rent a portion of it out during times when you need the income. Or you could rent the whole thing out if you have a way to live for cheaper somewhere else, such as in another country.

You might even have a second property which could be your vacation property that normally sits empty. During times when your fixed income has lost value (inflation), you can rent it out and make up any difference in income needs.

A Business

Do healthcare professionals need a side business? I haven’t figured out a final answer for this. However, the economy is changing in interesting ways and having a business is proving to have some great tax benefits and ways for us to protect the value of our savings.

I discussed consulting as a business. However, some of you may prefer to have a more hands-off business. Such entities certainly exist but you must put in the upfront effort to either partner with someone who is willing to do the legwork or explore franchise-like businesses which can operate with a manager.

Moonlighting

We make a very high hourly income as healthcare professionals. I wouldn’t give moonlighting advice to a school teacher for a way to increase their variable income. But for us, we can work a few hours a month and earn enough to cover rent, a property tax payment or our entire food budget for the month.

This doesn’t have to be an ongoing commitment, just enough to cover some bills when needed. The other advantage is that if the work is done as an independent contractor, you’ll be able to write off some of your work related expenses against it. A win-win.

 

In Summary

It’s great to have a little of both. A fixed income is easier to establish and can provide a base – call it a floor. The variable income might make you shit your pants every so often as the economy goes up and down. It’s up to you and your risk tolerance to decide where you want to be on the continuum of fixed income versus variable income during retirement.

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