Should you use your retirement corpus for repaying debt?

Is it wise to repay loans using the retirement corpus

Pulling up the retirement corpus for loan repayment

Retirement is that stage of life when you bid goodbye to active employment and enjoy your golden years. Having fulfilled the majority of your responsibilities, retirement gives you time to fulfil your bucket list. However, retirement also means the absence of income, and while your responsibilities might have been fulfilled, your lifestyle expenses continue. Moreover, you need funds for your medical needs and also for your bucket list.

Given the financial needs of retirement, people create a retirement corpus. However, if there’s an outstanding loan, people use the retirement corpus for repayment. The reason – to close the debt before retiring.

While the reason makes sense, is using the retirement corpus for loan repayment a good idea?

It is usually not. Here are some reasons why –

1. It depletes the retirement fund

The primary reason why loan repayment using the retirement corpus is a bad idea is that the repayment will deplete your corpus. Supplementing the corpus might prove to be a challenge, especially when you are nearing retirement or when you have multiple goals demanding your attention and your savings.

If you do not restore the retirement corpus, life post-retirement might prove challenging, and you might suffer financial constraints during your golden years.

2. You need a corpus for your retired life

Post-retirement, you need a considerable corpus that pays for your lifestyle expenses and also the frequent medical bills that you might rack up. Given the rising inflation rate, you need sufficient funds at your disposal to meet the financial demands of life after retirement. Moreover, the retirement corpus can provide a source of regular income if invested correctly.

Using up the corpus would not only deprive you of the regular income stream, but it will also make it difficult to meet your expenses, making you financially dependent.

Related - Read how to calculate the retirement corpus

3. You might lose out on the tax benefits

If you have a home loan, prepaying it will also mean the loss of the tax-saving benefits that the loan provides. Under a home loan, you get tax benefits on both the principal and the interest paid. While the principal repaid qualifies for a deduction under Section 80C of the Income Tax Act, 1961, the interest payment is allowed as a tax-free expense under Section 24 and Section 80EEA of the Act.

As such, when you continue the loan repayment, you earn tax benefits for as long as the loan is active.

An adequate retirement corpus is a must if you want a financially independent life after retirement. If you use the corpus for loan repayment, partially or fully, you might jeopardize the financial security that the corpus brings.

So, try and keep your retirement corpus intact. Instead, if you have piling debts, you can liquidate other investments that you might have if you want to close the loan before you retire.

Some tips for managing your debt without disturbing your retirement fund are as follows –

  • Liquidate other investments, like fixed deposits, mutual funds, etc., if you want to pay off the loan.
  • Consolidate multiple debts into one to make repayments easier.
  • Check your affordability before availing of a loan so that repaying it doesn’t become a burden.
  • Cut down on unnecessary expenses to increase the repayments.

Learn the trick of debt management so that you can service your loans easily. Use your disposable income and other savings to pay off any outstanding loan. Avoid dipping into the retirement corpus because, once you use it, refunding it might not be your priority. An insufficient retirement corpus will cause financial problems in retirement, especially when you have no source of income. So, preserve your retirement fund and use other means for loan repayments.

Related - Here are four important factors to consider when planning for retirement

Check out this video about how to build up a retirement corpus

Retirement is that stage of life when you bid goodbye to active employment and enjoy your golden years. Having fulfilled the majority of your responsibilities, retirement gives you time to fulfil your bucket list. However, retirement also means the absence of income, and while your responsibilities might have been fulfilled, your lifestyle expenses continue. Moreover, you need funds for your medical needs and also for your bucket list.

Given the financial needs of retirement, people create a retirement corpus. However, if there’s an outstanding loan, people use the retirement corpus for repayment. The reason – to close the debt before retiring.

While the reason makes sense, is using the retirement corpus for loan repayment a good idea?

It is usually not. Here are some reasons why –

1. It depletes the retirement fund

The primary reason why loan repayment using the retirement corpus is a bad idea is that the repayment will deplete your corpus. Supplementing the corpus might prove to be a challenge, especially when you are nearing retirement or when you have multiple goals demanding your attention and your savings.

If you do not restore the retirement corpus, life post-retirement might prove challenging, and you might suffer financial constraints during your golden years.

2. You need a corpus for your retired life

Post-retirement, you need a considerable corpus that pays for your lifestyle expenses and also the frequent medical bills that you might rack up. Given the rising inflation rate, you need sufficient funds at your disposal to meet the financial demands of life after retirement. Moreover, the retirement corpus can provide a source of regular income if invested correctly.

Using up the corpus would not only deprive you of the regular income stream, but it will also make it difficult to meet your expenses, making you financially dependent.

Related - Read how to calculate the retirement corpus

3. You might lose out on the tax benefits

If you have a home loan, prepaying it will also mean the loss of the tax-saving benefits that the loan provides. Under a home loan, you get tax benefits on both the principal and the interest paid. While the principal repaid qualifies for a deduction under Section 80C of the Income Tax Act, 1961, the interest payment is allowed as a tax-free expense under Section 24 and Section 80EEA of the Act.

As such, when you continue the loan repayment, you earn tax benefits for as long as the loan is active.

An adequate retirement corpus is a must if you want a financially independent life after retirement. If you use the corpus for loan repayment, partially or fully, you might jeopardize the financial security that the corpus brings.

So, try and keep your retirement corpus intact. Instead, if you have piling debts, you can liquidate other investments that you might have if you want to close the loan before you retire.

Some tips for managing your debt without disturbing your retirement fund are as follows –

  • Liquidate other investments, like fixed deposits, mutual funds, etc., if you want to pay off the loan.
  • Consolidate multiple debts into one to make repayments easier.
  • Check your affordability before availing of a loan so that repaying it doesn’t become a burden.
  • Cut down on unnecessary expenses to increase the repayments.

Learn the trick of debt management so that you can service your loans easily. Use your disposable income and other savings to pay off any outstanding loan. Avoid dipping into the retirement corpus because, once you use it, refunding it might not be your priority. An insufficient retirement corpus will cause financial problems in retirement, especially when you have no source of income. So, preserve your retirement fund and use other means for loan repayments.

Related - Here are four important factors to consider when planning for retirement

Check out this video about how to build up a retirement corpus

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