Is Retirement Plan Halal: A Guide to the Principles of a Retirement Plan

Have you been curious and wondering is retirement plan halal? Here’s a guide to the guidelines and principles of a halal retirement plan that you need to know.

Financial planning for retirement is important but may be challenging for Shariah-compliant retiree who are trying to maintain their retirement savings due to the influence of traditional finance.

The principles of halal investing are the key to saving money and doing it in a halal way for retirees.

However, to answer your question correctly based on “is retirement plan halal”, actually, the answer to the question is yes, but it depends on whether the underlying investments are Shariah-compliant.

Halal is a retirement plan that adheres to Islamic law, which means that investments must not involve high levels of uncertainty or attract interest(riba).

Therefore, at Retirement Outsourcing Services, we will ensure to provide you with the best financial security that ensures a dignified life, and religious commitment that keeps the conscience clear to the extent that you won’t have the reason to have a second thought.

Having learnt from that, now let’s delve into understanding and answering your question: Is a retirement plan halal?

What you need to know

Imagine you are faced with the overwhelming thought of “this is my last day of work” and closing your desk, saying goodbye to your colleagues, leaving, and feeling the fact that you won’t be receiving your monthly income like you used to, and knowing fully that you are opening a new chapter of your life. A stage where there’s no paycheck, but the peace of mind is still present.

As for the Muslim investors, this stage is not just about the money in a bank, but also about being assured that every money spent was in full compliance with shariah principles, free from riba (interest), gharar (unsafe uncertainty), and prohibited industries.

That balance is what everyone wants, such as financial security that brings about a good life, and religion for conscience. However, retiring with halal means living without financial strain and religious concerns.

The primary investment model in both traditional and Western retirement planning was focused on creating maximum profit with varying levels of risk tolerance.

However, in recent times, there has been a growing need for Sharia-compliant retirement planning arrangements.

Due to the growing demand for socially responsible investment, Islamic finance has created options for retirement planning that are Sharia-compliant.

Sharia law highlights the importance of socially responsible investing. And as for investors seeking to create a halal retirement fund, it restricts their portfolio to investments that are socially responsible.

Next in line is to look at the factors that constitute halal investing.

What constitutes halal investing?

It’s essential to understand what constitutes Shariah-compliant investing since all retirement plans involve investment.

1. Interest and usury are not permitted in the religion, which is explicitly prohibited by law (Riba).
2. The avoidance of Gharar requires a combination of clear and transparent contracts and minimal restrictions on the use of the asset as a speculative instrument.
3. The use of investment or investments in companies that engage in prohibited activities should be avoided.
4. Profits in Islamic finance must be based on profit and loss sharing or income earned from goods and services provided.

What are the principles for establishing an all-inclusive halal retirement plan?

It’s important to consider some of the principles and concepts required to ensure that halal retirement plans align with Islamic values before diving into them.

These principles outline the crucial steps that investors must take to ensure their retirement plans are halal.

1. Active screening for halal

As the saying goes, prevention is always better than cure. Therefore, it is essential to verify that investments made through halal sources are compatible with Shariah principles and retirement funds and plans.

It’s a way of making sure that nothing in the portfolio goes over this particular period.

Halal retirement investment is most secure when it comes to selecting assets that are essentially halal, such as real estate, gold, and other commodities.

2. Zakat

Islam mandates that individuals who have gathered more than enough money to meet their basic living expenses give 2.5 percent of their annual income through zakat.

On the other hand, Nisab is calculated separately for each type of wealth, including investments such as financial instruments and real estate, goods and commodities, even if they are held in retirement accounts that are subject to tax.

Those holding any financial assets for the purpose of capitalizing on market value are stripped of them, while those holding an income-generating asset have their zakat deducted from each year’s income.

The simple truth is that zakat, being the obligatory tithe, also guarantees your investment in halal funds.

3. Purification

Halal investing requires the inclusion of purification, particularly if it involves components that are not compliant with Islamic law.

The amount of doubtful activity by companies in Islamic finance is limited to 5 percent, which is the maximum limit. Also, it is forbidden to put money into companies that surpass that range.

Those companies that have an amount exceeding it may be allowed to calculate the exact portion of their investment as haram and donate it to charity.

What are the common mistakes to avoid

1. Relying on a Single Asset

Investing your largest sum of money in one asset, such as gold or real estate, can increase the riskiness of your portfolio. Halal assets such as stocks and gold are the best way to expand.

2. Neglecting Zakat and Purification

To ensure that non-compliant income has not entered the portfolio unintentionally, halal portfolios must be regularly monitored, and if it is deemed appropriate, the banned portion should be given to charity.

Practical Steps to Build a Halal Retirement Plan

1. Define Your Retirement Goal in Numbers
2. Choose the Right Asset Allocation
3. Invest Regularly
4. Rebalance Annually
5. Monitor Shariah Compliance

In Conclusion

Finally, if you are considering building a secure and financial halal retirement plan, you need to do thorough research and make as many enquiries as possible you can.

Having learnt from this article, you must have gotten the answer to help solve your curiosity and help balance your knowledge of the halal retirement plan.