Retirement Planning: Are Fixed Deposits the right option?

Having just the perfect lifestyle all through your blooming age, would you want to compromise on that during your retirement? Well, I know, most of us wouldn’t want to. But the real question is, are we saving to lead such a relaxed and luxurious life post-retirement? Are we doing it in the right way?

Before we get onto answering these questions, first understand your expenditure. How much are you spending today? How much can you save? And, then estimate how much would you want during your retirement years.

Retirement is basically a goal that each one of us has, and it’s not something where we can negotiate or compromise on. It’s the biggest saving goal for everyone. Most families, even today, believe in holding their savings in Fixed Deposit account for their retirement.

FD is the most preferred investment option because

Easy to understand

Most of us tend to follow our parent’s style of investing. A fixed deposit has a maturity period of 12 to 60 months. The investor receives interest every quarter. Interest earned can be reinvested. These were popular during our parents’ generation because they were easily understood. You invest money and receive a fixed annual interest on the sum and thus the money grows.

Convenient

FD can be started in a bank right next to you. Hence the popularity. Ease of accessibility had made every household to invest their savings through FD.

Safety

Traditionally, everyone wanted to protect their capital and then the second preference was the return on investment. Banks were considered to be as safe as government securities. Therefore, everyone was more inclined to invest in a bank closer to them rather than running behind returns and risking their capital.

Is this the right choice for your retirement?

Nothing can be earned the easy way. Similarly, if its easy doesn’t mean that it’s the right option for you. Did you know that the returns on FDs are taxable and that most banks levy up to 2% on premature withdrawal of FDs? As a result, most people make between 3.5-5% returns on their FD.

FD’s offer a low rate of return

On an average FD offers 7% return. And, if you are contributing Rs 10,000 per month towards the retirement fund, how much are you really gaining? Is it sufficient to meet your retirement expenses? A higher return would help you lead a tension free retirement. Why do you think high returns are required?

To beat Inflation

Though FDs offer guaranteed returns, the returns do not beat inflation in the long term. Hence the need for different investment options with higher returns to help your returns be higher than the inflation. Since a retirement fund is usually 15-20 years down the line, you need to ensure that whatever you are saving today is earning you returns higher than the inflation rate.

Illiquid

Fixed deposits have a pre-agreed lock-in period, which means you’re at crossroads, should you need some money immediately. Also, early withdrawal means a lesser rate of interest than agreed upon on the deposit certificate, and it will even have a penalty. 

Returns are taxed

Interest on FD is taxed irrespective of you withdraw or invest back. Interest above Rs 10,000 is taxed based on the income tab slab of the assessee. For a person falling in the highest tax bracket, FDs aren’t a suitable option at all. This brings down the post-tax returns.

Fixed Deposits are definitely the safest option, but do you still think they are the right option for your retirement fund? The answer is a clear NO. Even for the most conservative investor, there are better options like Debt Mutual Funds. Debt Mutual Funds earn higher returns compared to FDs.

Read: Debt Mutual funds Versus Fixed Deposits?

Most individuals prioritize their immediate financial requirements over their retirement, which is one of the most important financial goals. Do not delay your investment, as retirement fund is the one that decides how you would lead your life during your golden years.

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