A fixed income can have several definitions. It can be defined as a secure and unchanging rate on an investment. For example, some people purchase bonds, and derive a secure rate of income from them. This is generally a low interest rate on the bonds purchased, but it is additionally a guaranteed and static rate of return. Essentially any investment with a guaranteed rate of return is a fixed income.
Mostly when people hear this term, they’re inclined to think it refers to a pension payment or a social security income that is fixed to a specific amount. This is usually what people mean when they say they are on a fixed income. In other words, without making additional investments that would secure more income, or without working, the person receives only their pension or the social security income—sometimes both, so the income does not rise or fall.
As many of the elderly are finding, without a significant fixed income, living can get very challenging. The income doesn’t rise to accommodate rising prices. With people now living longer than ever before, a small income can make for a person gradually sinking into poverty and being unable to live in manner they're accustomed to. Simple things like the rise in the price of gasoline can significantly affect the person with the income, making it impossible or challenging to travel, or to even take small necessary trips to grocery stores or to doctor’s offices.
This is why many financial advisors stress the importance of investments during your lifetime that will provide an income far above what might be needed at present. Prices of today can only be expected to rise, and it is unlikely that someone will be able to live comfortably on a fixed income that features only social security payments. To this end, many companies set up investment plans for their employees, such as 401ks or pension plans, and many people privately invest a portion of their funds to make living easier once they have retired.
Another type of fixed income could be referred to as a reverse fixed income. This is when you borrow money from a lender and promise to pay a certain amount each month, or on a regular payment schedule. The amount you promise to pay is set at a certain price, and unless the loan is re-negotiated, you are standing security for paying that set amount. In other words, the payment amount is “fixed” and you have made a secure promise to pay it as required.
A type of loan of this sort, such as a fixed interest mortgage rate on a house may prove to be an investment. If you are paying both principle and interest monthly on a home loan, you may actually get to keep a portion provided that real estate prices remain at the same level or increase. Therefore, though you are the person securing the loan and paying on it, it ultimately may be considered an investment that helps you when you do have a fixed income amount in retirement, since you could sell the home or mortgage to increase your income.
