By Pramod Kathuria, Founder & CEO, Easiloan
Financial decisions made early on in a person’s career can be decisive in planning for the future. While investing money in several different schemes, funds, and plans is a wise decision in the long run, investment plans can also come in conflict with the burden of having to repay mortgage post retirement.
That’s where a critical question arises, should you use your retirement corpus to pay off a home loan?
Retirement Planning is Vital
It is vital for every salaried person to plan investments in such a manner that financial needs are looked after once the age of retirement sets in. This certainly requires long-term planning, and a considerable effort to learn about the financial landscape prevalent in the country, usually through a financial advisor and consultant. More commonly, adults fresh into their careers often work hard to make their dreams of owning a home come true, which means taking up a hefty long-term loan that spans between 20 to 30 years. The repayment of these is usually a complicated matter, as owning a home comes with additional costs such as property tax, homeowner’s insurance, and more that are taken into account while calculating the estimated monthly installment.
Continue with EMI or Prepay?
Hence, the question remains over choosing to repay loans monthly after retirement or digging into the retirement corpus to pay the loan off in advance. Retirees with a well-planned retirement fund may not find it difficult to repay monthly mortgage payments. However, an individual on the brink of their retirement may access funds from a low-interest savings account to pay off mortgages. This applies exclusively to individuals who maintain a well-funded retirement account with substantial funds to meet any unforeseen expenditures, while maintaining a lifestyle best suited to their needs.
Keeping Retirement Fund Intact
As a general rule, withdrawing funds reserved for retirement is not advisable. If an individual withdraws from a retirement plan 6 months before turning 60, they incur tax deductions and early-payment penalties. Funding mortgage payments at the expense of retirement plans can put undue pressure on a person, taking away financial security post-retirement. Albeit the advantage a person gets having paid off home loans prior to their official retirement, it might not allow the individual to sustain the desired lifestyle due to insufficient funds from a reduced income. If funds can be invested at a higher rate of interest than the cost of the loan, it is suggested to do just that.
Repay Loans Early
A pre-emptive measure that can prove useful is to initiate extra payments towards loans at an early stage, say, in the first decade of availing the mortgage. This can provide a person the time and funds required to balancing out the tail end of their career, where the burden of loan repayments may be reduced due to early contributions to mortgage that decrease the principal value and in turn bring down the interest charged on it. However, in all cases and scenarios, it is best to leave the retirement corpus untouched, while ensuring a soundly driven financial plan that is able to accommodate both, investments towards retirement, and repayment of mortgages.