The Illusion of Steady Income?

Most people have the illusion that they have steady income. This is another example of recency bias (as it relates to income in this post) where people have become accustomed to their current income and forget it wasn’t always as it is now. It may have been lower, or even higher for some.

Want to prove it to yourself? Take a look at your Social Security statement’s earning history (page 3 of the report), looking at the Medicare column (especially higher earners). I see variable income for most people who come in to see me in their Social Security statement’s earning history and always get the same reaction where they never really thought about how variable their income was; though, they realize it when they think back on those years.

Why do I bring this up?

Because most people have the goal of steady income once they retire! A noble goal if it was realistic in a world where everything’s stochastic, in other words variable. So what happens when one tries to fix the income component? It hides the variable pieces and creates the illusion of absolute safety. Yes, the income may be guaranteed, until the pension fund runs out, or the insurance company can’t support their product promises anymore.

Moral of the short story: Somewhere there is variability in what supports your income while working and while retired. Variability exists everywhere in the economy and all the markets. Incomes vary from market forces affecting supply and demand for your services and thus income. Your employment choices were probably influenced by what the economy was doing along the way if you think carefully back about past earnings and your employment choices. Markets are a reflection of the earnings in the economy too.

Some buy a product to hide this variability from their view. This only transfers it and hides it from your direct view, but we all know it is still there underneath. The harder you try to lock in something so it doesn’t change, the more risk you’re taking on with everything else that does change.

I prefer an evidence based process that embraces variability and provides decision points to manage it. Income doesn’t need to change  a whole lot (another illusion that income has to be as variable as the markets). And the underlying assets are better poised to manage the inflation risk and keep purchasing power on par with expenses over time into the future. The risk with fixing the income is that inflation erodes the purchasing power of those fixed dollars.

You lived with variability in the past; you can (and probably will) in the future too. What your expenses will be in the future will also be different, and on different things than they were in the past. We’re always slowly changing those too, sometimes because of improvements in goods or services (e;g., cell phones over fixed wall phones), and sometimes because income changed and we made adjustments in expenses because of the adjustment in income.

So I encourage you to go to your Social Security statement and review your earnings history on page 3 of the downloadable report and see just how variable your income really was in the past.

Here’s a couple other reasons to log into your Social Security account online: 1) To monitor it against identity theft from someone starting your benefits for them without you; and 2) check your earnings history to make sure it is accurate and not missing (or have extra) earnings which affects your benefits estimate (and correct errors as soon as possible).

Photo by Joel Mbugua on Stocksnap

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