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Do You Think Investing in FD is Sufficient for Retirement Funding?

  8/12/18 7:19 AM

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When you hear the word “retirement”, what pops up in your mind? Is it a tropical vacation somewhere? Is it a golf course with friends? Or is it relaxing with your grandchildren? Whatever it is, it must be a happy image because retirement should be just that happy, healthy, and wealthy!

For this, you don’t have to worry about your age as age is just a number. It’s always fun to daydream about what your adventure might be, right? When you no longer have to work, what will you do to fill your days? After you finish your daydream, the reality of planning for a financially secure and healthy retirement sets in.

Let’s get started…

It is important to plan for your retirement. Your first step is to estimate how the amount of fund you may need post-retirement? Then consider how much income you’ll need to fund your retirement? Your retirement income needs will depend on your lifestyle and many other factors that can and probably will change over time.

Retirement is a pretty much a non-negotiable financial goal. It is also the biggest saving target that we as savers will aim at and where most of our savings will go.

Choosing the right investment instrument is an important decision. While there are a number of options that are available, Fixed Deposits are the most popular choice among most Indians. Let’s look at the reasons;

Reason 1: Fixed deposits are easy to understand

Traditionally, FDs are perceived to be simpler and easier to invest. We often follow in the footsteps of our elders when it comes to investing. Fixed deposits were popular because they were easily understood by people. You put your money in and you receive a fixed annual interest on the sum and thus the money grows.

Reason 2: Fixed Deposits are convenient

During earlier days, Fixed Deposits were the most accessible investment option for most people. You didn’t have to go much further than your local bank branch to open an FD.

Reason 3: Fixed deposits (seemingly) offer high safety of capital

Because of the traditional importance attached to the safety of capital, Fixed Deposits seemed to be a clear winner for most Indians. It was first about safety and then about returns. Banks, especially post-nationalization were supposed to be as safe as government securities.

But is it the right choice?

Fixed Deposits, though popular, may not be a perfect choice if you want to use them to finance your retirement. Here’s why:

  1. Low Rate of return: Your retirement will soak up the vast majority of your savings. Living on your savings for approximately three decades will need big corpus. Just multiply your current annual expenses by 30 and you will yourself learn how big a corpus.

    The average bank fixed deposit promise 6% – 7% as the rate of interest these days. Considering that the vast majority of us can invest modest sums like 5000 to 10,000 each month, this rate of return is not going to grow your wealth too much.

  2. Inflation renders your FD incapable: Your FD return is usually just about 1-1.5% above the current inflation rate. This means that your money is not really growing.
  3. Taxes: The interest received from FD is fully taxable, whether you withdraw the interest or not. If the interest is above Rs. 10,000 annually, then TDS is deducted automatically by the bank at the rate of 10%. So the post-tax return of a 7-8% FD is more like 5%-6%.

Knowing the above three, it doesn’t matter if your money is “safe” because it will be not sufficient to fund your retirement.

Your goal should be to ensure that your income during retirement should be adequate to cover all your expenses. After all, that’s why estimating those expenses is a big piece of the retirement planning puzzle.

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