Retirement planning is like preparing for a long journey—you need a solid map, the right tools, and a clear destination. But for Muslim investors, the journey comes with an extra layer of complexity: ensuring that every financial decision aligns with Islamic principles. That means no interest (riba), no gambling (maysir), and no investments in haram industries like alcohol, tobacco, or pork.
Sounds like a tall order? Don’t worry. With the right strategies and resources, you can build a Sharia-compliant retirement plan that’s both ethical and financially sound.
We’ll break down everything you need to know about halal retirement planning in this guide, from investment options to compliance tips. If you’re feeling overwhelmed, we’ll show you how you can use tools to match with experts who specialize in Islamic finance. Let’s dive in.
What Makes a Retirement Plan Halal Under Islamic Law?
A Shariah-compliant retirement plan blends traditional retirement goals with the ethical guidelines of Islamic finance. Before we get into the nitty-gritty, let’s check out the key principles of Islamic finance that guide Sharia-compliant retirement planning.
- No Riba (Interest): Any form of interest is strictly prohibited. This means avoiding conventional savings accounts, bonds, and other interest-bearing instruments.
- Ethical Screening: Investments must steer clear of haram industries like alcohol, gambling, and conventional banking.
- Risk-Sharing: Islamic finance encourages profit-and-loss sharing models, such as partnerships (mudarabah) and joint ventures (musharakah).
- Asset-Backing: Investments must be tied to tangible assets, like real estate or commodities, to avoid excessive speculation (gharar).
- Social Responsibility: Your investments should contribute to societal well-being, aligning with Islamic values of fairness and justice.
These plans need careful selection of investment vehicles and consistent monitoring to stay compliant. Investment choices usually include Shariah-compliant mutual funds, ETFs, real estate investments, and sukuk (Islamic bonds). Independent Shariah committees verify all these options.
Permitted vs Prohibited Investments
Shariah-compliant investments are based on asset-backed ventures, ensuring that every investment is grounded in real value. Investments in companies with excessive interest-based debt (over 33% of total assets) or non-compliant income (over 5% of total revenue) are avoided.
The Role of Purification and Zakat
Purification is an important aspect of Shariah-compliant investing. Zakat, the annual charitable contribution of 2.5% of eligible wealth, is required. Additionally, any non-compliant income must be purified by donating it to charity.
When planning for retirement, it’s important to account for zakat on retirement account gains. Experts recommend paying 10.3% of the annual investment value gain as zakat.
Building a Shariah-compliant retirement portfolio can be complex. Financial advisors with expertise in both Islamic principles and retirement planning can guide investors through this process, ensuring their retirement goals are met while staying within the boundaries of Shariah law.
Step 1: Start with Sharia-Compliant Assets
Investors who want to build a reliable retirement portfolio should learn about the available Shariah-compliant investment options. Islamic investment funds have shown remarkable strength lately. Many of these funds perform better than regular ones during market ups and downs.
Islamic Mutual Funds and ETFs
Professionally managed mutual funds and exchange-traded funds (ETFs) offer an excellent avenue for Muslim investors to diversify their retirement portfolios while adhering to halal principles.
These funds exclusively invest in Sharia-compliant stocks and assets, ensuring that your investments align with Islamic finance guidelines. They’re a great way to diversify your portfolio while staying halal.
- AMAGX (Amana Growth Fund): Focuses on growth-oriented stocks.
- SPUS (SP Funds S&P 500 Sharia Industry Exclusions ETF): Tracks the performance of Sharia-compliant companies in the S&P 500.
- SPRE (SP Funds S&P Global REIT Shariah ETF): Invests in Sharia-compliant real estate investment trusts (REITs).
Halal funds undergo rigorous pre-screening processes to ensure compliance, eliminating the need for investors to individually vet each stock. Furthermore, they often incorporate purification mechanisms, which involve donating any minor non-compliant income generated to charity, thereby maintaining the ethical integrity of your investment portfolio.
Pre-screen funds save you the hassle of vetting individual stocks. Plus, they often include a purification process to donate any non-compliant income to charity. By investing in Sharia-compliant mutual funds and ETFs, you can achieve a balanced and ethically sound retirement plan that aligns with your religious values.
- Expert portfolio management
- Continuous compliance checks
- Spread-out investments across sectors
- Regular cleaning of non-compliant income
Sukuk (Islamic Bonds)
Sukuk are the halal alternative to conventional bonds. Instead of earning interest, sukuk holders receive returns generated by the underlying asset, such as rental income or profit-sharing agreements.
These asset-backed securities offer fixed-income-like returns while maintaining adherence to Islamic finance principles. Sukuk represent ownership in real assets, projects, or services. Investors can access this market through the SP Funds Dow Jones Global Sukuk ETF (SPSK), which provides a diversified Sukuk portfolio.
For example, the SP Funds Dow Jones Global Sukuk ETF (SPSK) offers exposure to a diversified portfolio of sukuk. Sukuk are great because they provide steady, fixed-income-like returns without violating Islamic principles.
Real Estate Investments
Real estate. The SP Funds S&P Global REIT Shariah ETF (SPRE) helps investors tap into the global real estate market while staying true to Islamic principles.
Real estate is a classic Sharia-compliant investment because it’s backed by tangible assets. It stands out as an attractive choice for Shariah-compliant retirement planning because it gives investors actual asset ownership and the possibility to generate interest-free rental income.
You can invest directly in properties or through Sharia-compliant REITs like SPRE. Real estate offers long-term growth potential and rental income, making REITs a solid choice for retirement planning.
Individual Stocks
For investors who prefer a more hands-on approach, selecting individual stocks that meet Shariah compliance criteria can offer significant opportunities for high returns within an ethical framework.
Crucially, the core business activities of these companies should align with Islamic principles, avoiding involvement in haram industries like alcohol, tobacco, gambling, and conventional banking. Stocks are Halal as long as they keep exposure to forbidden activities below certain thresholds.
- Debt-to-equity ratios below 33%.
- Non-permissible income (e.g., interest) below 5%.
- Core business activities that align with Islamic principles.
Investors seeking more control over their retirement planning can opt for individual stocks that meet specific Shariah compliance rules. Technology and healthcare sectors are often well-aligned with Islamic principles, but investing in individual Shariah-compliant stocks requires diligent screening and regular monitoring to ensure ongoing compliance with Islamic finance principles.
This approach allows for personalized portfolio management and the potential for substantial financial growth, all while maintaining adherence to your ethical and religious standards. Managing your own halal portfolio is riskier and requires more work and competence, but it can also be more rewarding if your investments manage to beat the market.
Step 2: Screen Your Investments
Even the most carefully selected investments may generate some non-compliant income, such as interest from cash reserves. That’s where purification comes in. Here’s how it works:
- Calculate Non-Compliant Income: Determine the percentage of your investment’s income that comes from haram sources.
- Donate to Charity: Purify your portfolio by donating the non-compliant portion to a charitable cause.
Many Islamic mutual funds and ETFs handle this process for you, but if you’re managing your own portfolio, tools like Zoya Finance can help. Managing conventional retirement accounts while staying Shariah-compliant requires you to pay attention to investment screening and portfolio monitoring.
If your portfolio is too large or diversified to calculate yourself, you can use our free advisor matching tool to connect with an Islamic financial advisor. These professionals screen your investments and figure out how much non-Sharia-compliant income requires purification.
What Is Sharia-Compliance Screening?
Sharia-compliance screening is the process of evaluating stocks to ensure they meet the ethical and financial standards set by Islamic law. This involves two main components:
- Business Activity Screening: Ensuring the company’s core business activities are halal and do not involve haram industries like alcohol, gambling, pork, or conventional banking.
- Financial Ratio Screening: Analyzing the company’s financial health to ensure it doesn’t rely heavily on interest-based debt or generate significant income from non-compliant sources.
The goal is to create a portfolio that aligns with Islamic values while still offering the potential for financial growth.
Business Activity Screening
The first step in Sharia compliance screening is to evaluate the company’s business activities. This involves asking one simple question: What does this company do to make money?
Prohibited Activities
Islamic law prohibits investments in companies involved in:
- Alcohol: Production, distribution, or sale of alcoholic beverages.
- Gambling: Casinos, lotteries, and other forms of betting.
- Pork: Production or sale of pork and related products.
- Conventional Banking and Insurance: Businesses that earn income through interest or non-Islamic insurance models.
- Weapons and Defense: Companies involved in the production of weapons of mass destruction or unethical military activities.
- Adult Entertainment: Any business related to pornography or other explicit content.
If a company derives a significant portion of its revenue from these activities, it’s automatically disqualified from being Sharia-compliant. Some industries fall into a gray area, such as entertainment, media, or technology.
For example, a tech company like Apple (AAPL) may have a halal core business (selling iPhones and software) but could generate minor income from non-compliant activities, such as interest on cash reserves. These cases require further financial screening to determine compliance.
Financial Ratio Screening
Once a company passes the business activity screening, it’s time to dive into the numbers. Financial ratio screening ensures that the company’s financial practices align with Islamic principles.
Key ratios to consider
| Ratio | Threshold | Why It Matters | Example |
| Debt-to-Market Capitalization Ratio | Less than 33% | Measures the portion of financing from interest-bearing debt. A lower ratio indicates minimal reliance on riba (interest), aligning with Islamic finance principles. | A company with $1 billion in debt and $5 billion in market cap has a 20% ratio (compliant). |
| Accounts Receivable-to-Total Assets Ratio | Less than 45% | Reflects the company’s reliance on credit, which may involve interest. A lower ratio reduces the potential for non-compliance. | A company with $200M in receivables and $600M in total assets has a 33% ratio (compliant). |
| Non-Compliant Income Threshold | Less than 5% of revenue | Ensures income from non-halal activities (e.g., interest on cash reserves) is negligible, maintaining the company’s alignment with Islamic principles. | A company earning $10M in revenue and $400K from non-compliant sources has a 4% ratio. |
Step 3: Incorporate Zakat and Estate Planning
Zakat is the obligatory charity in Islam and must be incorporated into your retirement savings plan. The general rule is to pay 2.5% of your eligible wealth annually. For retirement accounts, you can calculate zakat based on the current value of your investments. Some scholars recommend paying zakat only on the portion of your retirement account that is accessible (e.g., after-tax contributions).
Islamic Estate Planning
Retirement planning isn’t just about saving for your golden years—it’s also about ensuring your wealth is distributed according to Islamic inheritance laws (Faraid). Here are some steps you can take to build a Sharia-compliant estate plan.
- Write an Islamic Will (Wasiyyah): Specify how your assets should be distributed.
- Appoint an Executor: Choose someone you trust to carry out your wishes.
- Consult a Sharia-compliant advisor: Ensure your estate plan aligns with both Islamic principles and local laws. Match with an advisor by taking our free quiz.
Purification Process
Even after rigorous screening, some non-compliant income may slip through the cracks. That’s where the purification process comes in. This involves calculating the non-compliant portion of your investment returns and donating it to charity.
How to Purify Your Portfolio
- Calculate Non-Compliant Income: Use the company’s financial reports or a Sharia-compliant screening tool to determine the percentage of revenue derived from haram activities.
- Apply the Percentage to Your Returns: Multiply this percentage by the dividends or capital gains you’ve earned from the stock.
- Donate to Charity: Give the calculated amount to a charitable cause that doesn’t provide personal benefit, such as public welfare projects or aid for the poor.
For example, if you earn $1,000 in dividends from a stock with 2% non-compliant income, you would donate $20 to charity.
Step 4: Work with a Sharia-Compliant Financial Advisor
Let’s face it: navigating the complexities of Islamic finance can be daunting. That’s where a qualified financial advisor comes in. They provide you with a tailored set of services that ensure your assets are halal and that your retirement plan is Sharia-compliant.
- Halal Investment Screening: Advisors can vet your portfolio to ensure compliance with Sharia principles.
- Portfolio Purification: They’ll handle the nitty-gritty of calculating and donating non-compliant income.
- Zakat Calculations: Advisors can help you determine how much zakat to pay on your retirement savings.
- Tailored Guidance: They’ll create a retirement plan that aligns with your financial goals and religious beliefs.
The right financial advisor can substantially affect your long-term investment success, especially in the specialized field of Shariah-compliant investing. Recent surveys show that investors who work with Shariah-compliant advisors are 75% more confident in their retirement planning decisions.
Invested Better’s advisor matching tool connects you with certified Sharia-compliant financial advisors. Take our free quiz and match with a Muslim financial advisor who will help you build a halal portfolio that sets you up fo retirement, inshallah.
Step 5: Monitor and Adjust Your Plan
Retirement planning isn’t a “set it and forget it” deal. Markets change, life happens, and your financial goals may evolve. Regularly review your portfolio to:
- Ensure ongoing Sharia compliance.
- Adjust your asset allocation based on market conditions.
- Reassess your retirement goals and timeline.
This guide is your roadmap to a financially secure and spiritually fulfilling retirement. Whether you’re just starting out or looking to optimize your existing plan, the key is to stay informed, stay compliant, and stay true to your values.
Don’t be afraid to go back, revisit previous steps, and readjust your plan based on your current circumstances and goals. Things in your plan may change over time, and it’s Allah’s will that we contend with life’s challenges rather than fall victim to them.
Why Sharia-Compliant Investing is Worth It
Retirement planning is a marathon, not a sprint. By following these steps and leveraging the right tools, you can build a Sharia-compliant retirement plan that’s both ethical and effective.
And remember, you don’t have to go it alone. Invested Better’s advisor matching tool is here to connect you with experts who can guide you every step of the way.
Benefits of an Advisor Specializing in Islamic Finance
A qualified Shariah-compliant financial advisor brings expertise that goes beyond traditional investment knowledge. These professionals understand both modern portfolio management and Islamic financial principles. They offer several key advantages:
- Deep understanding of halal investment screening
- Expertise in portfolio purification methods
- Knowledge of zakat calculations
- Experience with Shariah-compliant estate planning
- Regular compliance monitoring and adjustments
Our Advisor Match Tool makes it easy to connect with Shariah-compliant financial advisors. With just a few simple steps, you can find experts who specialize in halal investments, zakat calculations, and Shariah-compliant estate planning.
