Planning for “Fixed” Income During Retirement

• Fixed income during retirement can help provide stability to a retirement income structure, with less dependence on the stock market.
• Just as there are risks to a market-based investment portfolio, a fixed income retirement strategy has positives and negatives.
• Fixed income structures must be analyzed across the life expectancy of the individual/couple. While some may appear beneficial in the first handful of years, many years down the road inflation may significantly cut into the purchasing power of the cash flows.

Fixed Income in retirement can come from many different sources of assets.  It may be a pension, real estate rental income, bond/CD ladder, annuity, Social Security, or even an income-yielding individual bond.  In all scenarios, using “fixed” income as retirement income comes with many different benefits and risks.  While it is very situationally dependent, in most cases we welcome a degree of fixed income payments for retirees.  Below are several items to consider when contemplating fixed income for retirement needs.

1) We believe a fully-fixed retirement income structure is a luxury that not all investors can afford or will choose to afford.  Take for example the 70-year-old retiree couple who has $100 million but only needs $10,000/month for retirement expenses.   If desired, this couple can easily purchase a vehicle that produces a fixed monthly payment, adjusted for inflation, with little risk.  Unfortunately, most retirees are not in this scenario and they must take some degree of market risk to accomplish their retirement goals.

2) For most Americans, Social Security is their greatest “fixed” income source in retirement.  However, according to an AARP study¹, only 23% of Americans solely rely upon Social Security for 90%+ of their household income.  The remaining 77% must rely upon a combination of investment accounts and other sources.

3) Of those who are relying upon receiving Social Security in the future, changes likely need to occur to maintain the status quo of the program.  It is unknown if this will affect retirees, soon-to-be retirees, or younger generations.  However, we must be cognizant that a means-test, across the board cut, reduction to inflation increases, or some other change could occur to this fixed income source in the future.

4) “Fixed” income sources can at times provide a strong backbone for a retiree when creating a retiree’s income structure.  The sources can provide required income in early years of retirement should the markets/economy become soft.  As most know, these are the most important years of a retiree’s financial life.  Stated previously however, this is a luxury that may not be accessible for all, due to the costs the retiree must give up when purchasing significant fixed income (fees, possible lower yield, possible lack of inflation protection, possible lack of generational inheritance, possible interest rate risk, etc.).

5) Fixed income sources must be considered for the long-term, not just the short term.  It is important to evaluate how inflation, increased interest rates, longevity, generational planning, etc. may impact all fixed income structures.  Remember, at 3.5% annualized inflation, the purchasing power of $1.00 of income today will be equivalent to ~$0.70 of purchasing power in 10 years from now.  As life expectancies continue to increase and Americans continue to retire in their early to mid-60’s, income sources may be required to provide income for 30-40 years!!  In the same scenario as above, a 60-year-old retiree would see their $1.00 of today’s income discounted down to ~$0.24 of purchasing power at their 100th birthday.  Inflation protection would clearly be imperative!

6) When assessing risks, the risk of principal is not the only risk to consider.  Owning multiple types of assets may help alleviate different types of risks within any one family’s financial scenario.

As the market has recovered significantly from the March selloff, this is a great time to reevaluate asset allocation, location of assets, and overall risk within one’s financial scenario.  If there is anything that we can do to help with these conversations, please do not hesitate to contact our office at 859-226-0625 or info@ballastplan.com.

1. http://www.aarp.org/ppi/info-2015/people-aged-65-and-older-who-rely-on-social-security-for-90-percent-of-family-income-and-average-monthly-benefit-by-state.html