The Fixed Income Trap

With rising inflation, dwindling gov't benefits and fixed income investments distributing meager payouts, families, seniors, and special needs families are feeling the pinch of the fixed income trap.


With the recurring inflationary pressures in today's economy and cuts in public funding for health care, disability and other services, many individuals and families — especially seniors, families with special needs loved ones and others on a fixed income — are paying with funds coming from their savings, or emergency funds depending on the generosity of the family.

These budgetary realities require people to save more and shift their investment portfolios to include more income producing securities. With fixed income yields at historic lows, many folks find the income from their investments are not adequate to meet their needs. To complicate matters, families who sought less risk in their investments by investing in conservative securities found themselves caught in an increasingly risky situation - the fixed income trap.
Let me explain: Let’s say a family has government benefits and other fixed income investments that initally paid enough to satisfy monthly obligations. In today's inflationary environment, a family could soon find themselves struggling to pay the bills. Why? Because their interest income remained static while their expenses gradually increased over time. At some point in the future, the rising cost of daily living will meet and surpass the investor's fixed income.

To compound this stress, consider the consequences if that same family had their benefits reduced and/or needed additional income for extraordinary expenses, increased co-payments or an emergency. The family would be forced to drain their original principal investment to make ends meet. Having spent some of that principal, the remaining funds would now pay even less income, putting the family into a downward spiral of diminishing income and decreasing principal - the fixed income trap.
With state and federal agencies cutting services and benefits even deeper, this scenario is bound to be played and replayed an untold number of times. The income producing strategy I suggest to my clients helps address this problem by providing families the opportunity to grow their investment income year over year. To be continued....

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Derek B January 25, 2012 at 03:56 PM
Hi John, This is really interesting! So, I am a teacher in a local public school system. I do ok salary wise (~$75,000) plus a pretty good retirement pension. I am about 41 years old. I have 2 kids and my wife works. We basically pay out most of our take home pay for the mortgage, child care, regular bills and IF we are lucky--a small family vacation. It has been getting harder and harder to make ends meet since our salaries are not going up by expenses for day to day living continue to rise. What are MY options? Mike
John Mahoney January 26, 2012 at 10:33 PM
Hi Mike - Thanks for your comment. Your situation is typical among young families. Because I only have a thumbnail sketch of your financial situation, it would be inappropriate for me to make any specific recommendations for investments. What I often tell families in your situation, however, is to save, protect and grow. Save - With interest rates at historic lows, consider refinancing your mortgage to reduce your monthly payments. Maybe a low rate home equity line of credit could be used to pay off high interest credit card debt. In some cases a debt consolidation loan may be appropriate to help you free up monthly cash. Protect - Ensure you have enough life and disability insurance to protect your income if you die prematurely or became disabled. Review your auto and homeowners policies to ensure you have the most efficient combination of coverage and deductibles for the lowest premium. Grow - With the money you save, consider creating a balanced portfolio of investments using a disciplined strategy designed to grow income and overall value over the long-term. Make sure you are comfortable with your investments because you can't afford any sleepless nights. Remember - Save-Protect-Grow!


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