I think the confusion stems from people believing (me until this morning) that fixed income meant you relied on income from a source which paid a defined amount (social security, pension), rather than on income you controlled, like wages (work more to earn more) or drawing down investments/individual retirement accounts (you choose how much to withdraw). I legit did not know old school fixed income was income fixed in nominal terms, and I suspect most people (including those on social security and other retirement programs with automatic CoL adjustments) don't either!
You’re not wrong, TIPS (inflation-adjusted bonds) are normally still considered “fixed income securities.” It just has multiple meanings depending on context.
Seniors living on a fixed income is the same as millennials "living paycheck to paycheck": The number of people actually in that economic condition is dwarfed by the number of people who have placed themselves into that category based on vibes,
It is endlessly amusing to me when I see a Millennial or a Zoomer posting about their paycheck to paycheck budget and it's either "I don't have much left over after large 401k and roth contributions" or has some significant ongoing expense that is their fault like gambling debts or student debt for an MFA.
After rent, groceries, gas, dining out, newsletter subscriptions, contributing to my 401k, contributing to my taxable brokerage account, and my $1500-a-day Fabergé egg habit, I barely have anything left over to bet on five-way parlays so I can finally stop living paycheck to paycheck.
Matt is totally right on the actual technical details here (of course). OTOH, I sort of think he's missing the whole point of people using the phrase "seniors on a fixed income."
Similar to using the phrase "death tax" or "pro life," talking about seniors on a fixed income evokes emotions that everyone intuitively understands and relates to despite the technical inaccuracy. Real median income increases substantially as people age up until around age 50 or so. After that, and especially after retirement, median real income decreases substantially. This is mostly due to an intentional shift away from labor income, as people age. This shift is often heavily influenced by ever increasing physical limitations. The reality is that older households usually have much less ability to increase income if needed. So while it's technically true that SS income is automatically adjusted for inflation and stock portfolios can keep up with inflation over long periods, most people face a transition from flexible, labor-driven income to largely predetermined (and "fixed") income streams in retirement.
This is the dynamic people are thinking about when they use or hear the term "fixed income." The dynamic is less about inflation eating away at nominal income and more about higher exposure to things like sequence-of-returns risk, the possibility of reduced withdrawal capacity if markets underperform, and increased risk of unexpected expenses (especially health related). People intuitively get that this dynamic is at work for many retirees. The phrase "fixed income" works well as a proxy to capture the fact that unlike younger people, most older people are in a phase of life with almost no income flexibility and often have lots of concern about rising expenses relative to what they can sustainably draw from their resources.
I think Matt is correct that the phrase started out as a literal meaning of "fixed nominal income," and the latter meaning you describe is more of a reverse engineering of a phrase that doesn't apply as straight forwardly anymore.
That said, the stock market and inflation relationship is complicated by both time and interest rates. The market had its worst year in a while when interest rates were hiked to bring inflation back down to earth, which was terrible timing of you were drawing on it for incomes.
Overall, however, we need to be more clear eyed about the relative affluence between generations given our aging population
More accurate to say "fixed assets" but that's also not quite true. They're playing with a money pot that income no longer supports. Hopefully by that time in one's life the pot is big enough for it not to matter. If it is too small, like it is for many, we'd be better off just being honest and advocating for programs and benefits for poor seniors rather than pretending it's all fixed assets that are open to the same market turbulence as anyone elses investments.
We could also try to get more empty nesters to rent out their spare bedrooms. This has been banned in many places, and YIMBY should be pushing to repeal those rules. It used to be very common for empty nesters to rent rooms to young people, and bringing that back would create a lot of cheap rental housing.
I moved to New Zealand recently, and am renting what I think would be an accessory dwelling unit in US parlance. A huge portion of houses here have a small guest house that might host a young adult child or grandparents, but can also be rented out. Mine's basically a studio apartment but freestanding with its own parking space. It's been a much more pleasant place to live than the suburban apartment I used to rent in the states, with more natural light, no noisy neighbors, and much easier to carry groceries in.
>>But if affluent boomers were to sell their homes, realize large capital gains on the transaction, and move into smaller dwellings and live off their financial windfall, that would be a fine outcome for the country.
Looking at my local RE market the difference in price between a 4 bedroom and a 2 bedroom is not large enough to live off, especially after taxes.
A lot of the home price is tied to the land value, and a house with fewer rooms still needs a roof, boiler, kitchen, etc. and those are needed no matter how many bedrooms you have.
At least in MA, this only works if you move out of state or way west.
One of the more common ways to downsize is to sell and move into a continuum of care retirement community. So they sell the house, use that and other proceeds to buy into a place that has both a high buy in but also a significant ongoing payment need.
That actually is not very common as a downsizing step, because continuity of care places are so extremely expensive and assisted living is generally not needed for decades after kids leave. It would be a good way to run out of money.
I live in a moderately priced city. Some convenient apartments were built a few blocks from me. I took a look at them, and the rental cost for a studio is higher than my monthly utility and tax bill in a high tax city in NY for my 3 bedroom, 1500 square foot house. The house is paid off. It wouldn't make financial sense to move there.
True enough as a take, but a missed opportunity to talk about social insurance which does transfer income from the young to the old by borrowing from would be investors to pay the benefits. This means slower growth and lower incomes for future genertions. The social insurance defict is what we need to fix.
When my mother died, and we sold her house, I had enough money to pay off my mortgage. I have been in the same home since 1999. So now my bills include a small HELOC, taxes, and insurance, plus ever-increasing maintenance costs. In 2012, I paid $12,000 for a new HVHC system. I am told today that the cost would be $25,000. Should I need a new septic system due to newer regulations or a sand dome, I can expect to pay upwards of $40,000.
I live in NJ, which has the highest property taxes in the nation. There are programs to pay up to $6500 of seniors' property taxes. There are towns near me where smaller homes than my center hall colonial pay $25,000 a year. Property taxes go up every year in NJ. My dilemma is that I could sell my home for a bundle, but to buy in NJ, anywhere where you would want to live, would cost a bundle. Downsizing is not that easy. I could move to Indiana, but I would be alone as my wife would stay near our two girls. I would swap out outdoor expenses for an HOA fee; they also go up. Same with condo association fees.
Owning a home is expensive if you choose to keep up the maintenance. Living on well water is expensive. You need pumps, a soft water tank, salt, and filters. I needed a new system last year, and it was $12,000. Do I get to choose where I live? Partially. We could leave the girls and go somewhere where I know no one, nor the area. In my case, I’d have to find about 5 new doctors. It took me 6 months to see my cardiologist two years ago.
I think is quaint that Matt thinks I should just move to a state with lower costs so a younger family can move in. Would they be prepared for all the costs associated with a home? My wife gets a $1250 teacher pension after 19 years of service. She only got 16 years worth of service as she was a pregnancy leave teacher for three years and the Union pension only accepts someone on the tenure track. We pay about $850 a month for our Medicare Part B, which is why her pension is that small. Her SS is only about $2000, less her part B. She retired at 65.
If she were alone, trying to live in NJ on less than $4,000 a month, things would be very tight, and she would likely not have a home or own it. I dispute his assertion that seniors don’t have very tight budgets and are living some kind of life of luxury.
The biggest situation where I encounter seniors struggling with expenses increasing faster than incomes is about property tax. If you're one of those boomer empty nesters, then your house has probably appreciated a lot over the past decade, much faster than inflation. This leads to significant pressure by said boomers on local and state governments to cut property taxes.
The right solution is for our famously productive financial industry to figure out how to make this windfall profit get used to pay the tax bill, but that unfortunately hasn't happened yet.
Boomers, on average, are unlikely to live in dense urban centers and are even less likely to move towards dense urban centers. Property tax for the average Boomer is not a major expense.
Whenever I read stats like "28 percent of America’s large homes with 3+ bedrooms are owned by empty-nesters" I remind myself that the definition of a 'bedroom' has little to do with what a room actually is or is used for. If you buy a house, a bedroom is whatever the person who built the house told the town planning board was a bedroom, and they get the best selling price by maximizing it. OTOH I'm planning on building a house soon, and the more bedrooms I say I have, the stricter the requirements for my septic and other systems, so I'd rather minimize that and call an office an office than a bedroom.
A 3BR/1BA often just means you've got two offices or an adult couple that prefers sleeping apart. Not the most efficient use of real estate maybe, but it ain't the Soviet Union.
We need to float more debt and juice inflation further to transfer more income from workers to nonworkers (who are not future workers.)
I got so angry at the tax deduction for people over 65 in the OBBBA while doing taxes. It’s a break for like three years. Then there was a huge exclusion for capital gains income under like $90k AGI.
And what do people raising children get? A few bones, rising costs, and a deliberately sabotaged economy.
Long-term capital gains tax has always been 0% as long as I remember for couples under $90k or so total AGI; that wasn’t from OBBBA (OG FIRE people brought this factoid up a lot).
One of the significant undercounted transfers is Medicare. Looking at my parents last ten years, the level of spending on medical was significantly higher vs the amount sent by Social Security. This healthcare spending is really taken much of the worry about rising prices out for many in a real way but not in a psychological way.
The second thing I would say is although they were very well off, they had a very transaction view about being owed their Social Security. I doubt that they paid in enough compared to what they took out. So here was for them a program that they very much did not need but viewed as owed to them even though they had already taken out all their contributions very early.
When my wife first ranted about this it redpilled me like never before. Even the term makes no sense -social security gets a guaranteed raise matching inflation. No one working a regular job gets that - our income goes down over time by default! We are LUCKY to have a fixed income that doesn't go down. Plus obviously their house and stock values only go up.
There’s a rhetorical sleight of hand in this piece where the 3/4 of seniors who aren’t relying on social security are categorized as “rich seniors,” who are fine because they own stock and “the stock market has done extremely well in recent years.” True, but obviously not always true! If you’re in your twilight years, you’d be foolish to keep the lion’s share of your wealth in high-risk, high-return investments. Instead you’d want to put it somewhere safe, like a savings account. Safe, but not guaranteed to outpace inflation. You might also purchase an annuity, which is precisely what I think of when I hear that a senior is on a fixed income.
Lol, I still remember my high school history textbook unironically using the phrase “nobles with fixed incomes” (and just googled it and looks like it’s in AP European History study guides: https://www.pastpaperhero.com/resources/ap-european-history-16th-century-society-and-politics-class-religion-and-gender-remained-hierarchical) like it was a trying to get us to feel bad for them. Seniors incomes are not fixed but even if they were, “fixed incomes” do not necessarily mean low incomes, and we should be concerned with people who have low incomes rather than fixed ones.
In the financial planning realm there are probability forecasts and guardrails that advisors usually hold clients to in order to control their spending each month. In a strict sense this is living on a fixed income. However retiree clients invested in the stock market via a 401k, IRA, or brokerage account can absolutely adjust their disbursements unlike a pension or social security. Given what Matt said about the recent returns of the stock market, there is more flexibility for the 401k millionaire to spend more during good times. Couple that with relatively high value real estate which can be sold or reverse mortgaged and the picture is a bit brighter for retirees nowadays.
I think the confusion stems from people believing (me until this morning) that fixed income meant you relied on income from a source which paid a defined amount (social security, pension), rather than on income you controlled, like wages (work more to earn more) or drawing down investments/individual retirement accounts (you choose how much to withdraw). I legit did not know old school fixed income was income fixed in nominal terms, and I suspect most people (including those on social security and other retirement programs with automatic CoL adjustments) don't either!
You’re not wrong, TIPS (inflation-adjusted bonds) are normally still considered “fixed income securities.” It just has multiple meanings depending on context.
I knew that but indexed income is still relatively fixed wrt to wages (or rent) that grow in real terms.
Seniors living on a fixed income is the same as millennials "living paycheck to paycheck": The number of people actually in that economic condition is dwarfed by the number of people who have placed themselves into that category based on vibes,
Economic myths are bad! https://www.slowboring.com/p/this-economic-myth-needs-to-go-away
It is endlessly amusing to me when I see a Millennial or a Zoomer posting about their paycheck to paycheck budget and it's either "I don't have much left over after large 401k and roth contributions" or has some significant ongoing expense that is their fault like gambling debts or student debt for an MFA.
After rent, groceries, gas, dining out, newsletter subscriptions, contributing to my 401k, contributing to my taxable brokerage account, and my $1500-a-day Fabergé egg habit, I barely have anything left over to bet on five-way parlays so I can finally stop living paycheck to paycheck.
Matt is totally right on the actual technical details here (of course). OTOH, I sort of think he's missing the whole point of people using the phrase "seniors on a fixed income."
Similar to using the phrase "death tax" or "pro life," talking about seniors on a fixed income evokes emotions that everyone intuitively understands and relates to despite the technical inaccuracy. Real median income increases substantially as people age up until around age 50 or so. After that, and especially after retirement, median real income decreases substantially. This is mostly due to an intentional shift away from labor income, as people age. This shift is often heavily influenced by ever increasing physical limitations. The reality is that older households usually have much less ability to increase income if needed. So while it's technically true that SS income is automatically adjusted for inflation and stock portfolios can keep up with inflation over long periods, most people face a transition from flexible, labor-driven income to largely predetermined (and "fixed") income streams in retirement.
This is the dynamic people are thinking about when they use or hear the term "fixed income." The dynamic is less about inflation eating away at nominal income and more about higher exposure to things like sequence-of-returns risk, the possibility of reduced withdrawal capacity if markets underperform, and increased risk of unexpected expenses (especially health related). People intuitively get that this dynamic is at work for many retirees. The phrase "fixed income" works well as a proxy to capture the fact that unlike younger people, most older people are in a phase of life with almost no income flexibility and often have lots of concern about rising expenses relative to what they can sustainably draw from their resources.
I think Matt is correct that the phrase started out as a literal meaning of "fixed nominal income," and the latter meaning you describe is more of a reverse engineering of a phrase that doesn't apply as straight forwardly anymore.
That said, the stock market and inflation relationship is complicated by both time and interest rates. The market had its worst year in a while when interest rates were hiked to bring inflation back down to earth, which was terrible timing of you were drawing on it for incomes.
Overall, however, we need to be more clear eyed about the relative affluence between generations given our aging population
More accurate to say "fixed assets" but that's also not quite true. They're playing with a money pot that income no longer supports. Hopefully by that time in one's life the pot is big enough for it not to matter. If it is too small, like it is for many, we'd be better off just being honest and advocating for programs and benefits for poor seniors rather than pretending it's all fixed assets that are open to the same market turbulence as anyone elses investments.
We could also try to get more empty nesters to rent out their spare bedrooms. This has been banned in many places, and YIMBY should be pushing to repeal those rules. It used to be very common for empty nesters to rent rooms to young people, and bringing that back would create a lot of cheap rental housing.
I moved to New Zealand recently, and am renting what I think would be an accessory dwelling unit in US parlance. A huge portion of houses here have a small guest house that might host a young adult child or grandparents, but can also be rented out. Mine's basically a studio apartment but freestanding with its own parking space. It's been a much more pleasant place to live than the suburban apartment I used to rent in the states, with more natural light, no noisy neighbors, and much easier to carry groceries in.
What is the rationale for these bans?
A lot of them were passed in the 1950s to keep poor people and black people out.
Ah of course.
>>But if affluent boomers were to sell their homes, realize large capital gains on the transaction, and move into smaller dwellings and live off their financial windfall, that would be a fine outcome for the country.
Looking at my local RE market the difference in price between a 4 bedroom and a 2 bedroom is not large enough to live off, especially after taxes.
A lot of the home price is tied to the land value, and a house with fewer rooms still needs a roof, boiler, kitchen, etc. and those are needed no matter how many bedrooms you have.
At least in MA, this only works if you move out of state or way west.
One of the more common ways to downsize is to sell and move into a continuum of care retirement community. So they sell the house, use that and other proceeds to buy into a place that has both a high buy in but also a significant ongoing payment need.
That actually is not very common as a downsizing step, because continuity of care places are so extremely expensive and assisted living is generally not needed for decades after kids leave. It would be a good way to run out of money.
It’s a problem in the low cost Midwest, too. Downsizing housing does not result
In much, if any, release of capital. Most 2 bedroom condos are close in price to 4 bedroom homes.
I live in a moderately priced city. Some convenient apartments were built a few blocks from me. I took a look at them, and the rental cost for a studio is higher than my monthly utility and tax bill in a high tax city in NY for my 3 bedroom, 1500 square foot house. The house is paid off. It wouldn't make financial sense to move there.
True enough as a take, but a missed opportunity to talk about social insurance which does transfer income from the young to the old by borrowing from would be investors to pay the benefits. This means slower growth and lower incomes for future genertions. The social insurance defict is what we need to fix.
Old Age Security in Canada that is very generous to even high income retirees is starting to get more attention for doing just that.
Australia's Superannuation scheme seems like a smart way to do things. Mandatory contributions and it's in the market.
When my mother died, and we sold her house, I had enough money to pay off my mortgage. I have been in the same home since 1999. So now my bills include a small HELOC, taxes, and insurance, plus ever-increasing maintenance costs. In 2012, I paid $12,000 for a new HVHC system. I am told today that the cost would be $25,000. Should I need a new septic system due to newer regulations or a sand dome, I can expect to pay upwards of $40,000.
I live in NJ, which has the highest property taxes in the nation. There are programs to pay up to $6500 of seniors' property taxes. There are towns near me where smaller homes than my center hall colonial pay $25,000 a year. Property taxes go up every year in NJ. My dilemma is that I could sell my home for a bundle, but to buy in NJ, anywhere where you would want to live, would cost a bundle. Downsizing is not that easy. I could move to Indiana, but I would be alone as my wife would stay near our two girls. I would swap out outdoor expenses for an HOA fee; they also go up. Same with condo association fees.
Owning a home is expensive if you choose to keep up the maintenance. Living on well water is expensive. You need pumps, a soft water tank, salt, and filters. I needed a new system last year, and it was $12,000. Do I get to choose where I live? Partially. We could leave the girls and go somewhere where I know no one, nor the area. In my case, I’d have to find about 5 new doctors. It took me 6 months to see my cardiologist two years ago.
I think is quaint that Matt thinks I should just move to a state with lower costs so a younger family can move in. Would they be prepared for all the costs associated with a home? My wife gets a $1250 teacher pension after 19 years of service. She only got 16 years worth of service as she was a pregnancy leave teacher for three years and the Union pension only accepts someone on the tenure track. We pay about $850 a month for our Medicare Part B, which is why her pension is that small. Her SS is only about $2000, less her part B. She retired at 65.
If she were alone, trying to live in NJ on less than $4,000 a month, things would be very tight, and she would likely not have a home or own it. I dispute his assertion that seniors don’t have very tight budgets and are living some kind of life of luxury.
The biggest situation where I encounter seniors struggling with expenses increasing faster than incomes is about property tax. If you're one of those boomer empty nesters, then your house has probably appreciated a lot over the past decade, much faster than inflation. This leads to significant pressure by said boomers on local and state governments to cut property taxes.
The right solution is for our famously productive financial industry to figure out how to make this windfall profit get used to pay the tax bill, but that unfortunately hasn't happened yet.
Boomers, on average, are unlikely to live in dense urban centers and are even less likely to move towards dense urban centers. Property tax for the average Boomer is not a major expense.
Whenever I read stats like "28 percent of America’s large homes with 3+ bedrooms are owned by empty-nesters" I remind myself that the definition of a 'bedroom' has little to do with what a room actually is or is used for. If you buy a house, a bedroom is whatever the person who built the house told the town planning board was a bedroom, and they get the best selling price by maximizing it. OTOH I'm planning on building a house soon, and the more bedrooms I say I have, the stricter the requirements for my septic and other systems, so I'd rather minimize that and call an office an office than a bedroom.
A 3BR/1BA often just means you've got two offices or an adult couple that prefers sleeping apart. Not the most efficient use of real estate maybe, but it ain't the Soviet Union.
We need to float more debt and juice inflation further to transfer more income from workers to nonworkers (who are not future workers.)
I got so angry at the tax deduction for people over 65 in the OBBBA while doing taxes. It’s a break for like three years. Then there was a huge exclusion for capital gains income under like $90k AGI.
And what do people raising children get? A few bones, rising costs, and a deliberately sabotaged economy.
Long-term capital gains tax has always been 0% as long as I remember for couples under $90k or so total AGI; that wasn’t from OBBBA (OG FIRE people brought this factoid up a lot).
One of the significant undercounted transfers is Medicare. Looking at my parents last ten years, the level of spending on medical was significantly higher vs the amount sent by Social Security. This healthcare spending is really taken much of the worry about rising prices out for many in a real way but not in a psychological way.
The second thing I would say is although they were very well off, they had a very transaction view about being owed their Social Security. I doubt that they paid in enough compared to what they took out. So here was for them a program that they very much did not need but viewed as owed to them even though they had already taken out all their contributions very early.
I support you raising the price of a subscription after several years of not keeping pace with inflation.
Raise Alex's subscription and leave mine alone! Please, and thank you.
When my wife first ranted about this it redpilled me like never before. Even the term makes no sense -social security gets a guaranteed raise matching inflation. No one working a regular job gets that - our income goes down over time by default! We are LUCKY to have a fixed income that doesn't go down. Plus obviously their house and stock values only go up.
There’s a rhetorical sleight of hand in this piece where the 3/4 of seniors who aren’t relying on social security are categorized as “rich seniors,” who are fine because they own stock and “the stock market has done extremely well in recent years.” True, but obviously not always true! If you’re in your twilight years, you’d be foolish to keep the lion’s share of your wealth in high-risk, high-return investments. Instead you’d want to put it somewhere safe, like a savings account. Safe, but not guaranteed to outpace inflation. You might also purchase an annuity, which is precisely what I think of when I hear that a senior is on a fixed income.
Lol, I still remember my high school history textbook unironically using the phrase “nobles with fixed incomes” (and just googled it and looks like it’s in AP European History study guides: https://www.pastpaperhero.com/resources/ap-european-history-16th-century-society-and-politics-class-religion-and-gender-remained-hierarchical) like it was a trying to get us to feel bad for them. Seniors incomes are not fixed but even if they were, “fixed incomes” do not necessarily mean low incomes, and we should be concerned with people who have low incomes rather than fixed ones.
In the financial planning realm there are probability forecasts and guardrails that advisors usually hold clients to in order to control their spending each month. In a strict sense this is living on a fixed income. However retiree clients invested in the stock market via a 401k, IRA, or brokerage account can absolutely adjust their disbursements unlike a pension or social security. Given what Matt said about the recent returns of the stock market, there is more flexibility for the 401k millionaire to spend more during good times. Couple that with relatively high value real estate which can be sold or reverse mortgaged and the picture is a bit brighter for retirees nowadays.