Foolishly Fixated

Richard Quinn  |  Jul 7, 2023

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.

I write on a regular basis for HumbleDollar.com a personal finance site with daily stories about people and their money and their lives dealing with finances. There are extensive comments on each article that you will find interesting and perhaps helpful. Above is my latest article.