Fixed deposits can be crucial in planning a person’s retirement life and income after they stop working. Compared to keeping cash at home or some risky investments, fixed deposits offer stability as banks are regulated and will pay back our initial deposit amount and the promised interest without fail.
However, the rate of returns on fixed deposits over many years may be at rising prices or inflation. By putting some money in secure fixed deposits, retired person can find a balance between safety and healthy growth in their life savings.
This article will explain how a fixed deposit can help with retirement planning.
What are Fixed Deposits and How Do They Work?
A fixed deposit (FD) is considered a safe and secured investment offered by banks and financial associations. It allows people to deposit an amount for a pre-defined tenure, ranging from 7 days to 5 years or more, per the individual’s needs and financial goals.
The main benefit of FDs is that you simply deposit your principal amount, sit back, and earn regular interest payouts as returns till maturity. Unlike stocks or mutual funds, there is no risk of losing the initial investment.
The returns are agreed upon beforehand at a fixed rate, which depends on the overall bank rates and tenure. Short tenures of 7 days to a year may earn about 2.5% to 5% returns, while longer tenures of 5 years and above can yield over 6%.
Post-Retirement Planning
Recognising that senior citizens depend heavily on steady and safe investments in their non-earning years, banks provide higher FD interest rates exclusively for those over 60. Depending on the banks, the difference between normal and senior citizen FD returns can range from 0.25% to 1%.
Thus, on a Rs. 30 lakh deposit for 5 years, a senior may earn almost Rs. 1.5 lakh more in interest. Special FD schemes with monthly payouts or quarterly earnings are also offered to seniors to supplement their retirement income.
Moreover, the tax exemption limit is higher for those above 60. Income tax rules do not apply to FD interest earnings below Rs. 50,000 annually. For those below 60, the tax-free FD income limit is Rs. 40,000 annually.
However, this provides a major financial relief to pensioners who depend on interest income from their life savings without worrying about taxes eating into their returns.
Benefits of Fixed Deposits
Some major benefits of Fixed Deposits for Retirement Planning are:
1. Lower Risk, Regular Returns
Since FDs are safer than market-linked investments and do not face volatility, they deliver stable and predictable returns. It works well for retirees on a fixed income who cannot take higher risks with their money.
2. Money Remains Easily Accessible
While funds get locked in for the FD tenure, one can access easy loans against their Deposit in emergencies. Many banks offer this overdraft facility against your FD to help you retrieve money instantly while continuing to earn interest rates.
3. Provides Diversification
Financial advisors often suggest diversifying one’s investment portfolio across various assets instead of relying completely on equities or real estate in retirement. Having 30-40% of the retirement money in low-risk FDs provides stability and balances the overall risk effectively.
Alternatives to Fixed Deposits for Retirement Planning
1. Balanced Mutual Funds
These funds invest across equity and debt assets to balance risks versus returns. They tend to perform better than FDs over the long run while mitigating risks through Diversification. Systematic withdrawal plans allow regular income, too.
2. Monthly Income Plans
MIPs allocate predominant debt and small equity exposure to deliver steady monthly payouts together with some capital appreciation to counter inflation.
3. Bank Small Finance Bank Deposits
Small finance banks provide FD interest rates of 8-9% to safeguard income stability.
4. Annuity Plans
Like pension plans, these offer lifelong regular income through a lump sum or periodic payments made earlier.
Conclusion
Based on the pros and cons of using bank fixed deposits to fund one’s retired life, they make for a relatively safe, convenient, and easy-to-operate investment option for senior citizens in their golden years.
The guaranteed returns and tax benefits provide stability to cover basic costs without volatility. However, considering reinvent risks, illiquidity factors, and potentially insufficient long-term earnings, it may be wise to park only some of your retirement money in FDs.
