Arranging your financial affairs so you can enjoy your retirement is arguably the most important aspect of your long-term financial planning. The majority of retirees rely on a pension or superannuation plan that pays out to members once they reach a certain age or meet other conditions. But what about long term deposits? They attract better rates, you don’t have to wait to meet some arbitrary age and you retain control over your own assets. Here are some factors to bear in mind when considering which alternative to use.
It is possible to fund your retirement with long-term deposits. A long-term deposit can attract a great interest rate, especially for deposits that mature over five or ten years. The additional control you have over your funds means you can reinvest your fund into deposits with better rates as they mature and become available to you. Deposits become additionally attractive when the market looks down as you can secure a good rate.
The major advantage that pension plans have over long-term deposits is that they are subject to much less taxation. Contributions to your retirement fund while you are working can reduce your taxable income and money in pension fund is taxed at a lower rate than term deposits. Finally, when you retire pension funds are often made available tax free, depending on where you live. What this means is that a pension plan may generate less income for you as it grows more slowly, but this is offset as it attracts much less tax.
Long-term deposits and pension plans therefore have their advantages and disadvantages. An important point to bear in mind is that this is your retirement funding. The money should kept in low risk investments and spread out to minimise the risk even further. Bearing this in mind, a balance between long-term deposits and superannuation is advisable.
Ultimately, the tax breaks and other benefits of a pension fund make relying solely on term deposits for your retirement counterproductive. Yet the great returns of term-deposits dictate they be give at least some part in your portfolio. The old saying ‘don’t keep all your eggs in one basket’ seems to apply to your retirement as much as investing in general.