When it comes to investments, guaranteed returns are a good thing. Who does not want their money to give returns that one is sure of? Especially when it comes to retirement. 

Guaranteed insurance plans do exactly that. It works in this way. One pays a premium for a certain term and can get a guaranteed payout every year, quarter, or at one specific period after retirement. There are different variations of such plans. 

“Insurance firms that promise a steady and predictable income in retirement or throughout a certain maturity period are the main providers of guaranteed income plans. They provide guaranteed payment independent of market volatility, which is one of their primary benefits. This makes them particularly appropriate for retirees and anyone seeking stable cash flow. Additionally, because the rewards are tax-free in the holders' hands, it eliminates the tax concern,” says Amar Ranu, head - investment products & insights, Anand Rathi Shares and Stock Brokers. 

However, such plans will not be enough for your retirement. Let us see why. 

Inflation Will Erode Your Purchasing Power

One of the most significant problems with guaranteed income plans is that they do not account for inflation. For example, when you start planning, Rs 1 lakh a month might seem like a comfortable sum. However, inflation will increase the cost of living over time. You will require much higher than Rs 1 lakh when you retire every month. And that will only go up with time. 

“Over time, this can leave you struggling to cover your growing expenses, especially in the later stages of retirement when healthcare and other costs typically rise,” says Rakshith HD, CFP, head digital sales, GoalTeller, a financial planning platform.

The Returns Are Too Low For Long-Term Security

Guaranteed income plans usually offer returns in the range of 5.5 per cent to six per cent. 

Let us take an example. To generate Rs 1 lakh per month with such low returns, you would need a retirement corpus of about Rs 1.7 crore.” 

“To accumulate this amount, you would need to invest Rs 4.3 lakh annually for 20 years or Rs 12 lakh annually for 10 years. For most people, these contribution amounts are simply too high, especially as retirement approaches and other financial priorities arise,” says Rakshith. 

Technically you can go for a guaranteed income plan that gives you a guaranteed income of any amount. But the premiums you would need to pay for that will be very high. That is not likely to be feasible. 

Contrast this with other, more flexible investment options. For example, a conservative investment portfolio might generate returns of nine per cent, while a more aggressive portfolio could achieve returns closer to 12 per cent. “With these higher returns, you could achieve the same Rs 1 lakh per month income with a much smaller corpus. At 12 per cent returns, you would need a corpus of around Rs 1 crore, and you could contribute just Rs 1.2 lakh annually over 20 years. This shows how other investments can help you achieve your retirement goals with much less strain on your finances,” says Rakshit. 

If you are willing to take on a little more risk, you might be able to invest in portfolios that provide higher returns over time. These options can allow you to achieve your retirement goals faster and more comfortably.