Planning for retirement involves making important decisions about how to protect and grow your savings. With so many investment options available, it can be challenging to find the right balance between security and returns. Term deposits, however, can offer a reliable, low-risk way to generate stable returns and preserve capital.
What is a term deposit?
A term deposit is a type of locked savings account. You put a certain amount of money into the deposit for an agreed-upon term length (this may be anywhere from a few months to a few years) and in return, you receive a fixed interest rate provided you hold to maturity.
The benefit here is that the interest rate won’t change during the term, provided you hold to maturity, so you know exactly how much you’ll earn by the time the term length ends. This level of certainty is what may make term deposits a suitable option for retirees looking to secure stable returns.
Term deposit benefits when planning for retirement
Stability and peace of mind
One of the biggest benefits of term deposits for retirees is the predictability. Unlike investments that fluctuate with the market, a term deposit gives you fixed returns provided you hold to maturity. For those who prefer safety and stability, particularly after a lifetime of building up savings, this predictability can offer real peace of mind.
When you’re retired, your priority may shift from growing wealth to protecting what you’ve already accumulated. Term deposits can help by keeping your principal amount safe, while also offering a boost to your savings.
Capital protection
Another benefit of term deposits is that they are designed to protect your original investment. This means that as long as you don’t withdraw your money before the term ends, you should get back the full amount you invested, plus the fixed interest earned. For retirees who want to reduce risk, this may make term deposits a useful tool for keeping their savings secure while still earning a return.
Plus, in Australia, term deposits up to $250,000 (per account holder, per authorised deposit-taking institution or “ADI”) are protected under the Government’s Financial Claims Scheme, providing added security for your retirement savings.
Regular, predictable income
One of the benefits of term deposits is the flexibility to choose when your interest is paid out, whether it’s monthly, quarterly, at the end of the term, or some other payment frequency offered by the relevant ADI. Not all term deposit providers offer this flexibility, however, so it’s important to do your due diligence before opening a term deposit.
However, if you choose a provider that does offer flexibility, this can be especially useful in retirement, as it allows you to create a reliable stream of income to help cover your everyday expenses and give you more control over your cash flow.
Term deposit considerations
While term deposits offer valuable stability, there are a few points to consider
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Interest rate. Returns tend to be lower compared to riskier investments (like shares, for example), so if you’re looking for significant growth, term deposits might not be the best option for you. However, they can still play an important role in preserving and steadily growing your savings.
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Restricted access. Term deposits are fixed for the term length, meaning early withdrawals can result in penalties (unless you’re facing proven financial hardship). This just means it’s important to plan ahead so you won’t need access to those funds before the term ends.
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No topping up. You can’t top up an existing term deposit during its term. If you want to invest more in a term deposit, you’d need to open a new one or invest your additional funds on any rollover of the original term deposit. However, this also offers flexibility in terms of choosing new term lengths, and corresponding interest rates, that suit your financial goals.
Term deposits vs superannuation
Term deposits can be an effective way to financially plan for your retirement. But what about when you officially retire and gain access to your superannuation? What happens to your money then?
You have a few options for how to manage your money, and two common choices are
- Staying invested through an account-based pension (also known as an allocated pension)
- Moving your money into something like a term deposit or savings account
Deciding what to do with your superannuation comes down to what matters most to you. If you like the idea of keeping your money growing and are okay with a bit of market risk, an account-based pension may be a suitable option.
If you’re more focused on stability and certainty, term deposits might feel more secure. Some retirees find a mix of both works well, for example using an account-based pension for long-term growth and term deposits for reliable, stable returns.
Summing it up
Like all financial decisions, incorporating term deposits into your retirement plan should align with your personal goals, risk tolerance, and income needs. Financial planning is not a one-size-fits-all process – what matters most is finding the right combination that fits your unique financial situation.
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