Should retirees look beyond fixed deposits for steady income?
Higher inflation rates and changing tax strategies have led most retirees to wonder whether simple fixed deposits are enough to cover their economic well-being.
Why fixed deposits remain in demand Fixed deposits (FDs) have been the popular investment option with elderly persons for decades. They offer capital security, assured return, and periodic receipts of interest, which old age craves for. Senior citizens are even offered a higher rate of interest by banks and post offices, more reasons for FDs to be the preferred choice. Their worst drawback, however, is returns hardly keep pace with inflation, cutting down purchasing power in the long run.
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Inflation and diversification pressure Inflation can gradually erode retirement savings, especially when healthcare and living costs rise at a higher pace than the return on FDs. A retiree earning 7% return on an FD might actually be incurring loss if inflation ranges from 6%-7%. Experts therefore advise retirees to diversify into other investments that may return more in the long run or offer inflation protection without sacrificing relative safety.
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Safer alternatives to consider Older citizens may also consider government-backed plans like Senior Citizens' Savings Scheme (SCSS), Post Office Monthly Income Scheme, or RBI Floating Rate Bonds. They have slightly higher returns and government guarantee. Debt mutual funds, particularly low-risk variants like short-duration or corporate bond funds, may be considered for enhanced tax efficiency. Insurance company annuities may also provide lifetime income, though less flexibly.
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Balancing safety and growth Equity exposure during old age is generally eschewed, but a limited share in the form of balanced advantage or conservative hybrid mutual funds is used to combat inflation. It should be limited to 10–15% and checked periodically. The balance can be invested in low-risk schemes such as FDs, SCSS, or bonds. A laddering strategy—apportioning FDs and bonds over tenures—can also be used to match liquidity requirements and returns.
Role of taxation in decision-making Tax efficiency is the second diversification reason. Interest earned on FD is taxed slab-wise, which may be a strain on senior citizens who are in senior income brackets. Debt funds will benefit from indexation, though, if they are of a long-term tenure, reducing tax outgo. Senior citizens also need to avail themselves of Section 80TTB for tax deduction up to ₹50,000 on FD interest in a year prior to making portfolio mix choice.
