How To Use Fixed Deposits For Retirement Income

As you approach retirement age, it's essential to consider ways to supplement your income and ensure a comfortable post-retirement life. One option that many people rely on is Fixed Deposits (FDs). 

Fixed deposits offer a safe and reliable investment avenue that can help you generate regular income during your retirement years. In this article, we will explore the benefits of using fixed deposits for retirement income and provide valuable insights into retirement planning.

Retirement Planning Tips 

The below mentioned tips can help you create a robust retirement plan, ensuring you have the financial resources to enjoy your desired lifestyle in your later years.

• Start Early and Save Regularly

  Starting early allows you to take advantage of the power of compounding and build a substantial retirement corpus over time. Ensure that you allocate a portion of your monthly income towards retirement savings.

• Diversify Your Investments

  While fixed deposits provide stability, it's crucial to diversify your retirement portfolio to maximise returns. Consider investing in other avenues such as mutual funds, stocks, or real estate to balance risk and potential growth opportunities.

• Set Realistic Financial Goals

  Define your retirement goals based on factors like lifestyle aspirations, healthcare expenses, inflation, etc. Assess your current financial situation and calculate how much you need to save each month to achieve those goals. 

• Seek Professional Guidance

  Retirement planning can be complex, especially when it comes to tax implications and investment options. Consider consulting a financial advisor who specialises in retirement planning to create a comprehensive strategy tailored to your needs.

Why Include Fixed Deposits for Retirement Planning?

Fixed deposits (FDs) can be an effective strategy for supplementing retirement income, particularly for senior citizens. Here’s how they can serve as a reliable financial tool:

• Guaranteed Returns

  FDs provide guaranteed return on investment, which is crucial for retirees who may rely on fixed income sources. Unlike stocks or mutual funds, where returns can fluctuate, FDs offer a fixed interest rate, ensuring that retirees receive a stable income without exposure to market risks.

• Higher Interest Rates

  FDs offer higher interest rates compared to Savings Accounts. Senior citizens are eligible for additional interest rates, which is usually 0.5% above the regular interest rate.

• Regular Income Streams

  You can choose interest payout options that suit their financial needs. Banks like Ujjivan offer non-cumulative FDs that offer periodic interest pay-outs - monthly and quarterly - providing a consistent cash flow to cover daily expenses or supplement pensions. This regular income can be especially beneficial for those who no longer have a salary.

• Flexibility and Management

  You can select the amount you wish to invest and the tenure of the deposit, providing flexibility in financial planning. You can also choose to reinvest FDs to take advantage of compounding interest, further enhancing the income potential.

• Tax Benefits

  Tax Saver Fixed Deposits offer tax benefits under Section 80C of the Income Tax Act. You can claim tax deductions up to ₹1.5 lakh, as per current tax rules and regulations as on 20 October 2024. However, kindly note that tax saver FDs have a lock-in period of 5 years, meaning you cannot withdraw the amount before the stipulated time.

• Security of Investment

  FDs are considered one of the safest investment options, as they are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC) up to ₹5 lakh per depositor per account. This insurance provides peace of mind for retirees concerned about the safety of their capital.

   

FD Charges that Senior Citizens and Retirees Should Know 

While investing in fixed deposits is relatively straightforward, it's essential to understand the charges associated with them. Here are some common fees and charges related to FDs:

• Premature Withdrawal Penalty: If you withdraw your FD before the maturity period, banks may charge a penalty. You would need to check with your bank on the applicable charges currently. 
• TDS (Tax Deducted at Source): The interest earned on FDs is taxable at 10%. For individuals below 60 years, TDS is deducted if the interest income exceeds ₹40,000 in a financial year. For senior citizens (60 years and above), the exemption limit is raised to ₹50,000. 

Example:

Mr. Sharma, a retired individual, is considering two fixed deposits for retirement income. Bank A offers an interest rate of 6.5% per annum for a tenure of 5 years, while Bank B offers an interest rate of 7% per annum for a tenure of 7 years. Mr. Sharma needs to calculate the maturity amount to determine which option provides better returns.

Sample Calculation:

1. Bank A FD: Principal Amount = ₹1,00,000, Interest Rate = 6.5% per annum, Tenure = 5 years

• Maturity Amount = Principal Amount + Interest Earned
• Maturity Amount = ₹1,00,000 + (₹1,00,000 @6.5% for 5-years) 
• Maturity Amount = ₹1,00,000 + ₹32,500
• Maturity Amount = ₹1,32,500

2. Bank B FD: Principal Amount = ₹1,00,000, Interest Rate = 7% per annum, Tenure = 7 years

• Maturity Amount = Principal Amount + Interest Earned
• Maturity Amount = ₹1,00,000 + (₹1,00,000 @7% for 7-years)
• Maturity Amount = ₹1,00,000 + ₹49,000
• Maturity Amount = ₹1,49,000