Even in the dusky season of retirement, when one is meant to finally relax having successfully shouldered the responsibilities of a lifetime, the elderly today have creases of concern on their faces, as they find interests rates for their investments falling.

“Retirement has not been too exciting for me,” exclaims Anantharaman, who completed service two years ago. “I had planned for it to be special and I had put aside some money in fixed deposits (FDs). However, I had never imagined that the interest rates on our FD assets after retirement would be hit thus.”

Well, they have been. And the lack of good returns from FDs, after the fall from 8.5% to 6%, has really made life difficult for many senior citizens. But why have these rates plummeted?

In the beginning of August this year, the RBI cut the repo rate, or the rate at which banks borrow from the RBI, by 0.25%, which led to lower lending rates by commercial banks too. This is usually concomitant with a fall in the rates offered on FDs, which is what happened this year.

The slashing of interest rates on small savings instruments like Public Provident Fund (PPF) is valid, according to Finance Minister Arun Jaitley. The minister justified the move, saying that inflation was high and interest rates in India were“extraordinarily” so. The risk of the country becoming a sluggish economy due to high lending rates had led to the cuts.

The value of Fixed Deposits

Over the years, investing in fixed deposits has been a popular option. The safety and returns in investment, along with ease of operation, have always made it one of the most sought after schemes.

“Retirees like to go in for either gold or FDs,” explains Ramachandran, who retired from Tata Motors. “These have always been considered safe options. Gold is a good investment, but FDs were chosen because of the good monthly returns they offered. I never thought that we would be struggling to meet our monthly needs even after investing in FDs. It is an unexpected development.”

With falling interest rates, the current rate on FDs is about 7.25 per cent per annum if you want to invest for upto 10 years, though senior citizens may earn 0.25-0.5 per cent more than normal fixed rates per annum, depending on the bank. There are very few that offer an interest rate of 7.75 per cent to seniors when they invest in deposits that have a much longer tenure.

“Our bank offers a high interest rate of 7.25% for fixed deposits,” says Meena Kumari, a manager at an Axis Bank branch in south Bangalore. She agreed that interest rates have fallen, yet Axis Bank offers “among the highest interest rates offered by banks for retirees.”

Axis Bank offers 7.25%. But then, so do SBI, Kotak Bank, ICICI and Canara Bank. Right now, most people seem to feel that due to falling interest rates, and taxable interest income, the final returns for the elderly do not work out to anything significant, especially if the real rates of return are adjusted to inflation.

Worries of retirees

Under the circumstances, many elderly people seem to have written off their plans for a comfortable or luxurious life. The dip in interest rates means that they have to think twice, even before going out for a movie, or eating out. “why is the government targeting retired people?” demands Ramachandran.

Ramachandran explains that the situation in our country does not have any security built in. In the US and some other developed countries, elderly groups have a number of schemes to absorb the shock. They also do not generally invest in FDs, as the interest rates on such deposits are typically very low, at 2% to 3%. So people never considered FD savings to be a back-up for their retired lives. That however has never been the case in India, historically.

The concern over reduced rates is shared by retirees as well as members of the younger generation, who have also been hit. Nanak Ghosh, Proprietor of Decobuild and Dwell Well Homes cites the case of his parents, who live in Kolkata. Ghosh’s father retired in 2007 and as he had been working in a private company, he did not get pension. So he had invested Rs 25 lakh in fixed deposits.

The interest income earned was Rs 25,000 per month, which saw them through their monthly needs. However, they are now falling short by Rs 5,000 every month, and are unable to meet their expenses. Senior Ghosh has been forced to break his FDs a number of times, and feels that this source would soon dry up, and he may have to ultimately depend on his son.

Nanak Ghosh too says, “He is 84 years old. I expect that in another two years, he would have withdrawn all the money he had invested in Fixed Deposits. My father does not understand economics, but he does know that prices have risen, inflation has shot up and interest rates have fallen.”

Today, elderly citizens are struggling to even pay their insurance premium amounts. Medical insurance, which is so important for retired people, has also become expensive. “Government hospitals aren’t in good conditions, and private hospitals fleece you” rues Ramachandran, “Where would retired people go if they do not have good savings? My medical expenses alone set me back by Rs 5,000 per month.”

The retirees seem to be convinced about one fact – that they are slowly being robbed. Nanak describes how his father often laments, “In two years, I will be reduced to nothing.” All their lives, his parents had looked after the needs of the children, but now being forced to depend on them would be humiliating. “At least, in our case, it is better as we are here to look after our parents,” says Nanak,  “But what about others who may not be as lucky?”

Saving wisely

Many elderly people still trust government banks or the post office, where they get 8% rate of interest. So is that the best option under the current circumstances?

Certified Financial Planner and Investment Advisor, P. Srinivasan, Founder of Ace Financial Advisories, says that putting aside some investment in equity can bring greater returns. But it gets adjusted to the economy and the debt market.

The RBI is attempting to rein in inflation, so that the interest rates, too, are coming down. However, debts and mutual funds are still giving good returns.

Srinivasan explains that savings go through two phases. One is the accumulation phase, before retirement, when one is building the corpus. The other is the distribution phase, which happens later, in this case post retirement. The focus should be on accumulation while keeping in mind the distribution needs later.

To look at things positively, the real returns today are better according to Srinivasan, because inflation has come down. However, it might not always remain that way. Even if inflation goes up in the future, interest rates don’t automatically shoot up.

According to Srinivasan, there are two kinds of people who get hit by a fall in interest rates, as we are witnessing now. The first group is comprised of people who float considerable amounts money in debt, mutual funds and fixed deposits. They are enthused by high returns, so they decide to invest more, and then get badly shaken by the fall in rates.

The second group includes retirees who are used to particular lifestyles but cannot realign them to the fallen rates of interest. He advises that if you really want to keep aside a fund kitty for your future, then withdraw only 5% to 6% of your retirement corpus, investing in alternative options that permit you to withdraw before the end of your tenure. Keep aside 3% of it for the management of your future expenses.

But what are the alternative savings options open to a senior citizen post retirement? That is what we shall explore in a follow-up article.