Is there an adult in America that hasn't heard someone lament "I am living on a fixed income!"?  I know I've heard it 1,000 times. As a financial planner with a specialty in serving retirees however, I have not met many whose income is truly "fixed."

The last couple of years aside, recipients would get some cost-of-living adjustment even from stodgy old Social Security. Social Security is under stress and we can debate whether those stresses will change expected payments in the future. We can also debate the methodology to determine inflation adjustments and whether adjustments will be adequate to actually compensate for actual inflation. Nonetheless, the amount a household gets in Social Security payments is not "fixed."

Most families would have a tough time getting by on just Social Security.  Most rely on a variety of income sources, few of which are particularly stable.  Because of this, families, at least in part, draw cash flow from their portfolio to supplement varying income streams over their lifetimes.

While the coupon of a bond and the interest on CDs are typically a fixed amount, those interest payments do not last forever. CDs and bonds mature and some get called. As a result, income from interest-bearing investments vary.  Dividends from stocks also fluctuate, making investment income anything but stable over a retiree's lifetime.

Sometimes this shift can be rather dramatic. In November 1998, Citigroup paid a dividend of 9 cents per share. It steadily increased that dividend through 2007 all away up to 54 cents per share. Since early 2009 there have been no dividends paid, a stark reminder that companies thought to be reliable do not guarantee an investor a particular income stream.

Even diversified holdings considered safe can vary its income substantially. It took a global financial crisis to wipe out nearly all interest income from money market funds but dramatic drops have occurred many times in the past. For example, $100,000 in the average money market fund in 1990 would have yielded $7,700 in income.  By 1993, the same investment would have only generated $2,699. That's a 65% pay cut in just three years. An even bigger drop occurred at the beginning of the 2000s.

It is fairly common to see other income sources to retirees such as K-1's from various investments and business interests, royalty payments, and rental income from properties, many of which can change quickly.

The most common fixed payments come from defined benefit pensions and other annuity arrangements. Setting aside any concerns about the backers of such payments, these cash flow streams are subject to trade-offs too. One that can impact a family greatly is the choice of survivor benefit. The greater the survivor benefit chosen, the lower the payment, and the more the family will require of their portfolio. Of course, choosing no survivor benefit exposes the survivors to the risk of overreliance on the portfolio when that income stream drops to zero upon a recipient's death.

However, even if all sources of income were truly set in stone, a family's need for cash flow from its savings will surely increase over time due to inflation.  In addition, it seems likely that the tax rates applied to various income streams will be higher than they are today.

Ah. Yes. Death and taxes, the classic certainties of life. They go hand-in-hand and the effect on the finances of a married couple can be substantial. Obviously, the disappearance of cash flow due to a death and a lack of survivor benefit would have a profound effect on survivors cash flow needs. However, as I alluded to in my January column, "A Dollar Does Not Equal A Dollar," even if you could hold steady income streams, keep Social Security as it is, fix all expenses at current levels, and leave the tax code exactly as it stands today, the required cash flow from a portfolio increases upon a spouse's death.

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