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GOOGLE THE QUESTION, “How many Americans live on a fixed income?” You won’t find an answer. But we all know “fixed income” is used endlessly to describe the plight of us seniors.
For example, there’s this from the National Council on Aging: “Living on a fixed income generally applies to older adults who are no longer working and collecting a regular paycheck. Instead, they depend mostly or entirely on fixed payments from sources such as Social Security, pensions, and/or retirement savings.”
Fixed payments? It’s said so often that we’ve come to accept it as fact, but it isn’t true. At least a portion of almost every senior’s income is guaranteed to increase along with inflation. The larger the portion of retirement income that’s from Social Security, the greater the inflation protection, though it’s also true that folks in this situation are likely to have relatively modest incomes.
Since I began Social Security, my benefits have increased 33%, helping to offset the damage done by rising consumer prices. To be sure, Social Security benefits rise with a version of the Consumer Price Index known as CPI-W, not the more popular inflation measure known as CPI-U, and there’s a risk that the annual increase in benefits will lag behind the typical retiree’s cost of living. Still, Social Security recipients do better than many working Americans, who aren’t guaranteed an annual raise. Even Congress hasn’t had a pay raise since 2008.
The average Social Security benefit for retirees in 2000 was $816 per month. Since then, thanks to annual cost-of-living adjustments, or COLAs, Social Security benefits have climbed 64%. That means those receiving $816 in 2000 would have collected $1,338 in 2022.
What about those of us receiving a pension? Millions of state and federal government workers, as well as beneficiaries of some union pension funds and even a few private employer pensions, enjoy annual COLAs. But unfortunately, my pension doesn’t have a COLA, so it is indeed a fixed income.
The majority of people have no pension, and instead fund their own retirement. But on top of that, they have Social Security—assuming they contributed—which provides about 40% of the retirement income of the typical senior. For those retirees following the 4% rule or a similar portfolio withdrawal strategy, annual inflation adjustments are also part of the strategy.
No, retired Americans don’t live on a fixed income. But are the COLA increases always adequate? Probably not, so that means it’s helpful to have a financial buffer.
Regardless of your primary source of retirement income, it’s good to be able to generate more income when it’s needed and, until it’s needed, to reinvest that income. To me, that means high-yield savings accounts, interest on bonds and dividend-paying stocks.
My suggestion: Divert a portion of your savings for retirement to such investments and then reinvest all earnings for as long as possible. Add to these investments with any found money, such as gifts, tax refunds, overtime pay and year-end bonuses. Don’t think of this as your core retirement money. Instead, it’s your future inflation buffer.
The ultimate income from this strategy might be modest or it could be thousands of dollars per month. But given the typical Social Security COLA increase of some $35 a month in recent years, adding even another $100 to monthly income would be significant for many seniors. One stock I’ve accumulated for more than 50 years, and which has paid dividends for over 100 years, now generates the equivalent of $90 a month in dividends.
My wife and I invested our Social Security benefits, which I claimed at my full Social Security retirement age while I continued to work for a few additional years, in municipal bond funds. Today, after more than a decade of reinvesting, those funds generate several hundred dollars per month in tax-free income—which we could then spend if we needed it.
Richard Quinn blogs at QuinnsCommentary.net. Before retiring in 2010, Dick was a compensation and benefits executive. Follow him on Twitter @QuinnsComments and check out his earlier articles.
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Dividends are an illusion. They are not income. The reason they are in illusion is when you receive one dollar dividends the value of the stock goes down exactly one dollar. Dividends are a psychological license to spend. They are not income the way interest on bonds is income.
And in addition, please tell the IRS dividends are not income.
I better tell my wife, she is planning on spending the next dividend payment, but if it’s not income she is in for a shock.
‘And then the stock goes up by one dollar and often more.,
For those seniors who do their own taxes, they know that, while relatively generous, the CPI for SS benefits is offset by the fact that if there is additional income(earned, pension, interest etc) beyond $32K for married, filing jointly or $25K for all other filers some portion of their SS benefits will become a taxable item on their Federal return. The $32K and $25K has not changed since at least 2019. While something like the standard deduction is adjusted for inflation yearly for all taxpayers.
The taxation of SS benefits is based on the fact that overall beneficiaries pay only 15% of the cost of the lifetime benefits they receive, hence maximum taxing 85% of benefits.
Thanks for this article; it’s very timely for me. I am recently retired with only a very modest non-cola pension and am interested in generating more income. Its time to move some assets out of the S&P 500 and into a dividend paying mutual fund. Can you share which dividend mutual funds you recommend?
This question and both replies sound suspiciously bot-like. Maybe that’s just because I read the article on ChatGPT
Jackie, This article and your question motivated me to go back and reread a prior HD discussion of dividend paying funds: https://humbledollar.com/2023/01/death-to-dividends/. While the author of the article argues against dividend paying funds to generate income, the many comments discuss that and alternate views, and include other suggestions of dividend funds to consider, such as VIG Vanguard Dividend Appreciation ETF: https://investor.vanguard.com/investment-products/etfs/profile/vig, and VYM Vanguard High Dividend Yield ETF: https://investor.vanguard.com/investment-products/etfs/profile/vym. I found the discussion on the “death to dividends” article very educational.
Vanguard Wellesley Income Fund Admiral Shares VWIAX
60%–65% bonds, 35%–40% stocks.
Seeks long-term growth of income, a high and sustainable level of current income, along with moderate long-term capital appreciation.
Equities with strong income orientation.
https://investor.vanguard.com/investment-products/mutual-funds/profile/vwiax#overview
The term “fixed income” isn’t always used literally in the investment world.
For example, while bonds and treasuries do pay a fixed rate if held to maturity they are often sold before they mature due to changes in their yields. Bond funds are also often referred to as fixed-income investments even though their returns vary from day to day.
Also, I believe the term “fixed income” as generally used in media indicates that there is only one source of income (typically SS). Fixed in the sense that it does not change significantly as compared to an hourly worke, who’s wages are based on the number of hours worded. Some someone on SS is realistically on a fixed income for all intensive purposes.
Very practical article. I have our emergency fund in a high-yield savings account which I opened several years ago with Amex Personal Savings to get 25,0000 Membership Reward points. It’s just sat there, and I’ve occasionally gotten emails saying they were raising the rate.
Your article prompted me to go look at the account, and holy cow. I knew the interest rate had steadily gone up from as low as 0.4% to the current 4%. Since January, monthly interest payments have been $250/month or higher—June was over $300. As you pointed out, on a retirement budget, that is real money.
We’re not retired yet, but now I’m thinking I should park more money in those accounts. (I also have one with Ally Bank for more general cash savings.) I’d thought we already had enough (too much?) cash—but maybe not!
Let’s hope inflation goes down as the interest rates drop.
We are among “the lucky” retirees.
We both get Social Security with it’s COLAs.
We both ALSO have pensions. And ours have modest (no more than 3%) COLAs.
And, being empty nesters, are in the process of, finally, downsizing.
The new place will, eventually, cost less each month than our current SFDD. Getting there, though, sure does seem costly.
It’s a long journey for sure, but worth the time, effort and money.
Nice article … “Congress hasn’t had a raise since 2008” … They don’t need or deserve one … the median net worth of the 113th Congress is well over 1,000,000
That’s a two edge sword though. On the salary for Congress an average person can’t afford to be in Congress and hence we end up with most members well off – and out of touch. On the other hand, several members are heavily in debt with a negative net worth. That may make them more subject to shall we say, influence. Depending on the calculation, you can’t live on net worth, you need income.