“Fixed incomes”
After discussing this with Lisa a little while ago, I wanted to make sure everyone else was just as mystified as to the meaning of “fixed income.”
I cannot count the number of times that I had gotten calls in a technical support capacity (at a certain small Athenian ISP) about billing issues from older, typically more rural customers. They were often frustrated with computer problems — ostensibly outside the scope of the ISP’s control, concern or interest — and demanded to know what we were going to do to fix them.
It was policy then to provide residential consulting services (a ridiculous idea) at a certain hourly rate, which I quoted to these wretched. At times, I was met with considerable indignation — “Young man, I am retired. Us senior citizens live on a fixed income! We can’t just be paying through the nose day after day!”
Now, I understand where they’re coming from. Also, a lot of these people came from areas like Greene County, GA, one of the poorer areas in Georgia with collapsed median incomes and a gradually eviscerated economic base whose legacy is connected with manufacturing. They may not be able to easily afford such professional services. That’s not a problem.
But on a purely semantic level, my insatiable curiosity leaves me with the quibble — what on earth is a “fixed income”?
Are only senior citizens beset with this cruel and unusual impediment?
In their estimate, do I not live on a fixed income too?
Aside from this, I have also seen the term repeatedly associated with people of geriatrically tending demographics in a number of articles dealing with personal finance, and so on. “Older people have trouble stomaching the copayments associated with many coverage plans because they live on a fixed income.”
Pray tell, what is a fixed income?
Of course, I’m being a little pedantic; I think I know what it means. I assume that what it means is that once a person reaches retirement, they are no longer actively generating income for themselves (unless they have made successful investments that continue to pay substantial interest to form the basis of their income). Therefore, their pool of livelyhood is static and depleting, encouraging maximum frugality so that it might last long enough, one might hope.
But that is a “fixed” pool of wealth. That is not a fixed income. A fixed income is simply a quantiatively bounded disbursement collected with some regularity.
Even Donald Trump has a fixed income. Its fixture may just be so large so as to be considered practically inconsequential, as it would not appear to limit most of his conceivable ambitions, up to and including buying small Third World countries.
If any of you really have non-fixed incomes, would you be interested in funding Evariste Systems? Or at least send me the stock ticker symbol of your company and an invitation to the IPO? Will pay for options. Also, please send me your product literature on your Cold Fusion, Red Sea Parting, and Warp Travel offerings?
Or if you would like to pay me an unfixed income, I’ll shoot you my resume.
December 18th, 2007 at 4:02 pm
Many seniors don’t live off of a “shrinking pool of wealth”, but off of a fixed monthly income that is a combination of annuities and/or pension plans and/or social security. For better or worse, a lot of people, upon retirement, convert their savings into an annuity that will pay out a consistent monthly income until the death of the payee.
Still, it is a bit of rediculuous term often batted around by the AARP and similar. As you pointed out, most of the world is on a fixed income on some level or another–we are fortunate to be able to work a second or third or fourth job to augment that income; but even at that level it then becomes “fixed” at the combined income of the two or three or four jobs. And, as you pointed out, the problem is that it tries to avoid actually saying what the real problem is: that a lot of retired seniors are quite poor.
December 18th, 2007 at 4:10 pm
Thanks for that insight. I honestly did not know how income disbursements for retirees are done on a technical level.
I know a lot of retired seniors are quite poor, and I am perfectly capable of empathising with that. But my semantic pedanticism simply does not leave the term “fixed income,” especially as a lamentation, sitting well with me.
“Fixed” to me implies either unlimited, or at the very least, very dynamic and variable — and specifically, in accordance with one’s needs and wishes. While one may be more empowered to create this variability objectively as a younger person fit for the work force and able to make flexible economic decisions, the options are not nearly as flexible or empowering as one might be tempted to imagine from the removed vantage point of a campaigner or advocate of “causes of particular interest to seniors.”
December 18th, 2007 at 4:49 pm
In defense of the term “fixed income,” it derives from “fixed income securities” such as annuities, bonds, cd’s, etc., in which (unlike stocks) the investment yields a fixed return. Thus a person can be on a “fixed income” when they get their income from “fixed income securities.”
Jobs aren’t so much fixed income, because either you are in business for yourself or on a commission (in which case your income is very unfixed), or on a salary (in which the income depends on your CHOICE in jobs and/or performance, as opposed to a limited supply of fixed income securities.
Social security falls into the same category, because your payout is based on law and the contributions you’ve made to the program — analogous to fixed income securities.
Sloppy use yes, but not totally unreasonable.
~ A
December 18th, 2007 at 4:52 pm
What kinds of securities are fixed securities, and why would an older person necessarily have these types of investments as opposed to ones with a variable return, unless they necessarily crave the security of a predictable income? Does annual interest from pension plans count? What about people that aren’t retirees, but choose to live off of interest from large investments (i.e. the profitable sale of a business)?
Also, somehow I do not get the feeling that most people that use this term are doing so with such deliberateness and precision.
December 18th, 2007 at 7:03 pm
Fixed income securities are those that come with virtually no risk. People shift their investments to fixed income securities as they get older, and after retirement usually have exclusively fixed income securities, because they cannot afford major shifts in the market (Market was down about 30% between 2001 and 2003 — something you can’t afford if you are constantly drawing on your investment).
I would say that annual interest from pension plans counts as well.
Wealthy people living on investments would technically be on “fixed income,” but without the connotations of relative poverty carried by the term. They call those people “independently wealthy” instead.
I think you’re right — it’s just common usage much more than careful word chaoice. But I think it derives from something that makes
December 18th, 2007 at 7:03 pm
sense. Unlike leaving off the last word in a sentence.
December 19th, 2007 at 10:49 am
I’m still in mental pain from the sudden trauma of the mere mention of “residential consulting services”.
I would debate the topic of fixed income further, but for the moment I must go see about a proper PTSD diagnosis…and maybe even get a fixed income out of it….
December 19th, 2007 at 11:20 am
It’s true. “Residential consulting” sort of handicaps the very notion of “consulting” in this ar–
Ahem.
BEN! Mrs. Caruthers’ printer does not seem to be working! Go out and spend six hours fixing it for $35/hr - we’ll let our accountant take the support calls for now.
December 19th, 2007 at 2:01 pm
haha, because that makes just *so* much sense!
December 19th, 2007 at 2:06 pm
Yes. That hourly rate covers our overhead and augments our professional competency to deliver scalability and profitable value to our portfolio.
If we were in Tanzania.
Selling fixed securities.
Issued by the Angolan treasury.
December 19th, 2007 at 2:53 pm
In the form of Liberty Dollars.
With Dial-up access service for only $20(USD) more.
December 19th, 2007 at 3:06 pm
This is not how we do business.
December 20th, 2007 at 9:29 am
The general investing advice is to do high risk stuff (stocks) in your 20’s and 30’s and switch to bonds and treasury notes (low risk) about 10 years or so before retirement.
The general idea is based on the “faith based” ideal that the stock market will increment an average of 10% per year (or whatever), so that if you are in it for the long haul, you are safe doing high risk investments where the risk is amoritized by time (ie you may lose 1/2 of your savings at any, or multiple points) but, over the next thirty years, you will get a good return.
However, if you are needing the money in the next few years, then you may be less tolerant of the risk of losing half your capital when 1. you won’t have much time to regain your loses and 2. the difference between 4 percent and 8 percent return is negligible over a couple of years.
As a side note, typical layman investing usually involves buying when the stock market is “hot” (and therefore expensive) and then selling off after a crash because they feel like they are losing everything. I’ve lost count of the number of people who’ve said things like “I don’t keep anything in stocks anymore ever since the (last stock market crash); I made a bit of money and then lost if all” Stupid….the better investor would be “I especially keep a lot of money in stocks since the last stock market crash”.
Anyway, I digress. All that said, I don’t financially really agree with the idea of shifting risks at retirement, and I especially disagree with the idea of annuities (I just don’t see the math for annuities). I think a better approach would be to manage it yourself, take the amount that you’ll need for the next 10 years or so and shift that portion to low-risk investments, and leave the rest in higher return mutual funds. Sure, you may lose some, but you’ll also have the time to regain the loses.
However, while it may not make sense financially, it often makes sense pragmatically since many seniors (yikes, I’m going to get hit by the AARP swat team for this comment) often are incapable of having much involvement in their fiscal management on that level and are overly susceptible to making really stupid investment decisions (something we see a lot by a lot of the fraud targeting senior citizens).
December 20th, 2007 at 10:12 am
[…] Presidium Podium wrote an interesting post today on "Fixed incomes"Here’s a quick excerptA fixed income is simply a quantiatively bounded disbursement collected with some regularity. Even Donald Trump has a fixed income…. […]
December 20th, 2007 at 11:57 am
Clint:
Good post.
It’s all about risk-tolerance and immediate needs. For some people, “what they need for the next ten years” is about all they think they have, and about as long as they think they might live. Other people can’t stand risking their savings, even though their young and have another job, because market swings give them ulcers.
That’s why I think when people refer to being “on fixed income” when everything they have is in fixed income securities and social security — because they don’t have a job, and they don’t have enough wealth to have anything in the stock market. They get what they get and that’s it.
December 20th, 2007 at 1:11 pm
What is special about the math for annuities? I thought annuities were just a service that financial institutions provide that essentially allow you to build a composite, fixed recurring income stream blended from a variety of relatively static assets, and that the main value is that those accounts are automatically drafted, etc.
December 20th, 2007 at 3:43 pm
Depends on the type of annuity. Many many different types. My concern with annuities is that you’re adding a “middle-man” to the equation, who can guarantee you a minimum return, but in the long run is going to cost you more than self-managed investments, like Clint was saying.
December 20th, 2007 at 9:43 pm
As Daniel Davies (of d-squareddigest.blogspot.com) points out (and he works in financial services, so he is biased^H^H^H^H^H^H should know) the economies of scale generated by managing a bunch of people’s money together might well outweigh the profit skimmed off. (Well, he was actually talking about insurance, but annuities are a kind of longetivity insurance, in effect.)
December 21st, 2007 at 10:22 am
Longevity insurance is a good way to put it. But unlike catastrophe, it’s possible to plan for longevity — by having enough invested to live off the income. And if you have enough invested to live off the income, seems to me conventional investments are better than annuities, because you cut out of the costs of the middleman.
December 21st, 2007 at 11:04 am
Just what sort of service do “annuities” really provide that justifies the overhead/service fees? I was under the impression that composite disbursement wasn’t really a sophisticated “managed service,” which leaves me puzzled as to why it would “cost more in the long-run than self-managed investments.”
December 21st, 2007 at 11:45 am
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None really, except an insurance policy that “you will have this amount of income every month for the rest of your life no matter how long you live.” In exchange for that service, you pay all their corporate overhead, including salespeople, executive meetings and conferences, janitorial services, paper printouts …
It’s true, returns to scale reduce the impact of these additional costs on the individual investor … but i’d rather pay nothing than pay a little.
When you buy a mutual fund, you are paying people to put your money in stocks they think will make money. Therefore, mutual funds are worthwhile if their expertise is worth more than your share of the cost of the overhead (usually around 1%). For people that aren’t expert stock-pickers, it’s usually a good bet.
But annuities essentially don’t sell that expertise — they sell a guarantee that you’ll have income as long as you live. That’s good if you don’t have much money (so you’re dipping into your principal and might run out). But it’s no good if you have enough invested that you’re not substantially digging into your principle (because you’re not going to run out).
Say you save a million dollars, and stick it in 5% bonds and CDs. That’s $50k a year for as long as you live, without touching the principal. Not bad. You could even siphon off some of the principal in the early years of retirement, knowing that as you get older your living expenses will drop as your live becomes simpler.
In this scenario, an annuity makes no sense.
But say you’ve only got $200,000 invested. That’s only $10k in interest in fixed income securities. Not enough to survive. So you need to dip into your principal every year to survive. But you don’t know how long you’re going to live, so you don’t know how much you can afford to siphon.
That’s when you get the annuity, and pay the annuity’s costs of overhead. You’re buying the peace of mind that “I’ll have this income, however small it may be, as long as I’m around to need it.”
~ A
December 21st, 2007 at 11:52 am
Are you implying that annuities have some characteristics of a mutual fund or other type of managed fund, in that they continue to somehow invest / reinvest some portion of the principal and/or the return and then take a cut?
If not, then I don’t really understand what you’re paying for in this scenario:
I know how much principal I have. Why would I pay someone to come up with an arbitrary portion of it that should be paid out to me per annum?
December 21st, 2007 at 12:12 pm
Are you implying that annuities have some characteristics of a mutual fund or other type of managed fund, in that they continue to somehow invest / reinvest some portion of the principal and/or the return and then take a cut?
Yup.
I know how much principal I have. Why would I pay someone to come up with an arbitrary portion of it that should be paid out to me per annum?
Because you don’t know how long you will live. If you dip too heavily, you may run out. That being said, I agree with you — I’d never get an annuity because I don’t value the service they provide. But some people do.
Another potential scenario where it might have value: you’re rich and you want to live high on the hog without worrying about running out of money, and you don’t care about leaving an inheritance. You put your $5M into an annuity, get your $400k a year payout (instead of the $250k you’d make if you lived on the interest, live large without worrying about running out of money, and die broke.
December 21st, 2007 at 12:28 pm
So, basically, an annuity is a “conventional” thing to get when you want to trigger a disbursement of some combination of principal and interest off various types of investments, but generally foregone if you want to live purely off the interest, because that’s “simple”? Why is getting the interest + some portion of the principal more mathematically complex and requiring, even from a financially unsophisticated person’s point of view, someone else’s services to calculate that?
Also, does the annuity management know how long you’ll live?
No, I’m not trying to be funny. I still don’t understand what service they are providing.
How are they “guaranteeing” that I won’t run out?
December 21st, 2007 at 12:30 pm
Also, I fully intend to die broke. If I ever become wealthy, it’s all going to my family, my friends, their families, and others less fortunate than I am to help take care of them and make their lives better, while providing a sustainable and comfortable income for me.
In descending order of affiliation; family comes first, close friends second.
I have no need to be buried with Gs in my pocket.
December 21st, 2007 at 1:22 pm
Why is getting the interest + some portion of the principal more mathematically complex and requiring, even from a financially unsophisticated person’s point of view, someone else’s services to calculate that?
Because you don’t know how long you will live.
Say I just retired and I have $100,000 dollars. How much can I afford to spend each year? If I’m going to live 1 year, I can pull out the full $100k. If I’m going to live 10 years, I can only pull $10k per year. If I’m going to live 20 years, I can only pull $5k.
What happens if I pull $10k every year, but live 20 years? I’m going to run out after 10, and be really hungry for the last 10.
What happens if I pull only $5k every year, but die next year? I lived poor unneccesarily.
An annuity disburses the risk of longevity by dividing it among all their investors. They estimate how long they think you’ll live, (based on your age, health, etc), subtract their cut from that average, and offer you a monthly payout based on the average life expectency.
If you die younger than they expect, they keep the money you paid that they didn’t pay you back. If you die older than they expect, they keep paying you until you die, even though you’re a net loss to them (they pay you more than you paid them).
They make up the difference with the people who die before expected.
Also, does the annuity management know how long you’ll live?
They don’t know how long you as an individual will live, but they know your average life expectency, based on age, demographics and health factors. They’re pooling the risk of longevity, which averages out at something predictable, although it is largely unpredictable for any individual.
How are they “guaranteeing” that I won’t run out?
They pay you the agreed payment no matter how long you live. You get $500 a month until you die, whether you live 1 year or 30.
I have no need to be buried with Gs in my pocket.
Word.
December 21st, 2007 at 1:54 pm
Ah, okay. So it really does resemble insurance in the respect that it has an actuarial / risk management / statistical component to it.
December 21st, 2007 at 2:01 pm
Bingo. Sorry I wasn’t clearer on that earlier.
December 21st, 2007 at 2:06 pm
It’s not you being unclear. It’s me being characteristically thick.
December 21st, 2007 at 7:16 pm
And, I suppose for individuals whose longevity exceeds the adjusted mean, they just take that as a loss and factor its incidence into an annual loss expectancy the exact way an insurance company would?
December 21st, 2007 at 7:58 pm
Even after all this insight (thank you all very much for it), I am still not impressed with “fixed income” as a position of inability to pay for certain goods and services.
Income is what it is. We all have limiting factors. If you don’t want to pay, that’s one thing. Don’t resort to identifying particularities of your income stream. Everyone’s got those.
December 22nd, 2007 at 12:13 am
agreed. Just another silly colloquialism. Like “I could care less.”