Retirement is a pretty much non-negotiable financial goal for all of us. 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 financial instrument to invest in, for this goal, is a pretty important question for anybody who won’t have the luxury of a government pension ( even that’s not the same anymore
While there are a number of options that are available, in this article we want to examine the most popular choice that has been made so far by most Indians in the past - the fixed deposit.
Why did people choose Fixed deposits?
Reason # 1: Fixed deposits are easy to understand
We often follow in our parents footsteps when it comes to investing. Fixed deposits were popular because they were what was most understood by most 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
Fixed Deposits were also once the most accessible investment option for most people. You didn’t have to go much further than your local bank branch to open an RD or an FD.
Reason #3: Fixed deposits (seemingly) offer high safety of capital
Because of the traditional importance attached to 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 nationalisation were supposed to be as safe as government securities.
But were people making the right choice?
What’s easy is often not what’s right. Fixed Deposits, though popular, are a problematic 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.
Now how much does the average bank fixed deposit promise as rate of return these days? 7%. 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 our wealth by much. But why do you need a higher rate of return? Let’s find out with the next point.
#2. Inflation renders your FD toothless: 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: FD interest 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 frankly be not enough for you to enjoy a long retirement.
So to answer the question of whether an FD makes sense to fund your retirement, the answer for the vast majority for us is, NO!
PS: If you still want to use an FD, be prepared to invest huge sums each year to get anywhere close to a corpus capable of supporting you during your retirement.