Building a Retirement Nest Egg: Can FDs Be Part of the Plan?
Are you in your 30s, 40s, 50s, or even early 60s building a retirement
corpus or want to create a steady income stream to serve your lifestyle after
retirement? Well then, you must be wondering where to invest your money and if
fixed deposits (FDs) can be part of the plan. Retirement planning and related investment
is something that confronts everyone, especially amidst so many investment
avenues. However, let’s focus on FDs and if they work to help you have enough
to retire financially safely.
Different Fixed Deposit Options for Effective Retirement Planning
When you hear about FDs, the first option that comes to your mind is
bank FD. While that’s a potential option, it isn’t the only one. Here are a few
more FD options (across various age groups) for effective retirement planning.
Pradhan Mantri Vaya Vandana Yojana (PMVVY)
Pradhan Mantri Vaya Vandana Yojana (PMVVY) is a 10-year investment
scheme for senior citizens. The Life Insurance Corporation of India (LIC)
administers it for the Indian government. PMVVY offers a fixed income with a
current annual interest rate of 7.4%. The scheme allows you to choose monthly,
quarterly, half-yearly or yearly pension payouts.
Some other features of PMVVY include the following.
Ø Minimum investment of Rs 1.5 lakh to a maximum of Rs 15 lakh
Ø Senior citizens can borrow up to 75% of the invested amount after three years with the interest recovered from the pension.
Ø The depositor or investor can avail of exit options under specific circumstances
Ø The pension received is fully taxable
Ø The minimum age to invest in this scheme is 60
Senior Citizen Savings Scheme (SCSS)
As the name suggests, it is another savings scheme for senior citizens.
It is a government-backed scheme. Hence, many senior citizens and retirees
prefer investing in it. People 60 and above and even those between 55 and 60
who invest within a month of receiving retirement benefits can invest. Some
other salient features of the SCSS scheme include the following.
Ø Minimum
investment limit of Rs 1,000
Ø Maximum investment limit of Rs 30 lakh
Ø Five-year tenure with an optional extension in multiple blocks of 3 years each upon maturity
Ø The current interest rate is 8.2% per annum, payable quarterly and fully taxable
Ø The scheme doesn’t provide any interest on maturity. However, investors can claim a tax deduction under Section 80C of the Income Tax Act, 1961.
Ø Investors can make premature withdrawals with penalties
Bank FDs
Now, this one is a popular option and is open to everyone, no matter your age. You can begin creating fixed deposits from your 20s itself. Bank deposits offer fixed returns and have a lower risk associated with them. Hence, while many senior citizens prefer investing in FDs, even youngsters with a particular investment and risk-taking mindset are attracted to them. However, senior citizens get an additional interest rate of 0.50 per cent. With FDs, you can choose to receive the interest monthly, quarterly, half-yearly or yearly.
As for younger investors, long-term FDs can form part of their investment strategy and retirement planning. They can invest lumpsum amounts at various intervals in different types of FDs like tax-saving FDs, cumulative FDs, flexi-fixed deposits, etc., to benefit from the interest payouts.
It should be noted that tax-saving FDs have a lock-in period of five years. However, they allow you to claim an Income Tax deduction of up to Rs 1.5 lakh under Section 80C. The interest stays taxable though and banks deduct a TDS of 10 per cent if the interest income of all FDs exceeds Rs 50,000 in a FY for senior citizens.
Post Office Time Deposit Account (POTD)
Another option is the Post Office Time Deposit Account (POTD). It is a
popular small savings scheme from the India Post. The scheme has tenures of
one, two, three or five years. Senior citizens can open an account with a
minimum of Rs 1,000. The interest on your investment amount is calculated
quarterly. However, you receive it yearly.
Post Office Monthly Income Scheme (POMIS)
There’s one more post-office-based FD scheme and that’s POMIS. It is a
government-based scheme that offers a fixed monthly income to investors. While
it is open to everyone, typical investors include senior citizens looking to
earn a fixed monthly income. The scheme requires a minimum investment of Rs
1,000 and a maximum of Rs 9 lakh (single account) or Rs 15 lakh (joint
account). POMIS currently offers an annual interest rate of 7.40%.
Depositors receive interest at the end of every month and that stays constant throughout the five-year tenure. You can withdraw the money prematurely after a year with a penalty. However, you should note that POMIS does not offer any income tax benefits. The interest you receive is fully taxable.
How Beneficial are FDs for Retirement Planning?
FDs prove beneficial in various ways. Often, investors eyeing retirement
invest in fixed deposit schemes for benefits, including the following.
Safety and Stability
FDs are safe investments as they are offered by banks and have government guarantees to a certain extent. Hence, they are less susceptible to market fluctuations than other investment avenues like stocks that are sensitive to market changes. On the other hand, as FDs also offer a fixed interest rate, they form a source of fixed monthly income. Hence, investors can rely upon them, especially those investing from the retirement viewpoint.
Fixed Returns
Investing in stocks seems exciting owing to their potential high returns. However, there’s also an element of uncertainty associated with them. Unlike stocks or other investment avenues (sensitive to market changes), FDs offer guaranteed returns at the end of their investment period. That makes them a predictable investment option.
Diversification
FDs add value to an investment portfolio by helping the investor diversify it. Even when it comes to retirement planning or building retirement corpus, FDs help spread the risk. They help mitigate potential losses resulting from other investment options – something very important, especially while planning to build retirement funds.
Potential Inflation Hedge
FD interest rates may not necessarily keep up with the inflation rate. However, they can help safeguard the value of the investor’s wealth to some extent by serving as a hedge against inflation. Although the real returns may not be as lucrative after accounting for the inflation rate, FDs offer stability and security of investment. And that drives people to indulge in retirement planning towards it.
Liquidity
Another advantage of FDs is that you can withdraw your amount prematurely either in part or full to serve a particular need. Such liquidity proves useful for younger investors and senior citizens.
While that was about the benefits of FDs from the viewpoint of retirement, is there any other scheme or programme in which younger people, especially those in their 30s, planning to build retirement funds can invest?
Can the National Pension Scheme be an option?
Although it is a different stream of investment, the word pension (which becomes an income source after retirement) says much about it. So, while exploring it, let’s compare it with FDs and see if any one option emerges as a clear winner.
National Pension Scheme vs FDs – What is Better for People in their 30s?
30s isn’t the age when you think of retirement. However, the earlier you
plan for it, the better. Fortunately, in India, you have several options to
plan your retirement from an early age and build a significant corpus while
nearing retirement. While we’ve already seen what FDs are, another stream of
investment includes the National Pension
Scheme (NPS).
NPS is a government-regulated retirement savings scheme that aims to encourage people to save money and build financial security for retirement. Some benefits of NPS include the following.
High Returns: The contributions you make towards NPS are invested in different asset classes. Hence, they offer potentially high returns.
Significant Retirement Fund: Regular contributions over the years help build an appreciable amount in the NPS accounts that serve as savings for the person’s post-retirement years.
Tax Benefits: The contributions you make to NPs are eligible for tax deductions under sections 80C and 80CCD (1B) of the Income Tax Act.
Now what’s the difference between FDs and NPS? Which one is better?
FDs offer fixed returns. But NPS is market sensitive.
The contributions you make in NPS and its withdrawals are subject to tax
benefits. However, FD interest is fully
taxable.
FDs aren’t exclusively meant to serve retirement planning. However, NPS specifically intends to help people build retirement funds.
FDs allow you to withdraw money but at a penalty or an interest loss. On the other hand, NPS allows you to withdraw your money partially after a particular period.
So, which one is better? The answer depends on your objectives and risk tolerance with your income in the 30s or even 40s or 50s. You cannot rely on a single source or investment option to build your retirement fund. That’s for sure. Hence, a mix of both can prove more beneficial and serve various purposes apart from retirement while investing in an FD.
Consulting a finance and investment expert can help you make the right choice, depending on your financial needs, goals, other investments, expenses, etc.
Conclusion
We hope the above helps you make an informed decision and helps you plan your retirement effectively. Sign up with Altifi to invest in bonds if you are looking to invest in options beyond FDs.
Disclaimer: The contents of this article should not be construed as tax or financial advice. Readers should seek advice from their tax or financial advisor before making any investment decision.