Raising the pension fund to pay off a loan – is it a wise move?

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By Pramod Kathuria, Founder and CEO, Easiloan

The financial decisions made early 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 long-term decision, investment plans can also conflict with the burden of having to pay off a mortgage after retirement.

This is where a crucial question arises, should you use your retirement corpus to pay off a home loan?

Retirement planning is vital

It is vital for every employee to plan their investments in such a way that their financial needs are taken care of once they reach retirement age. It certainly requires long-term planning and considerable effort to familiarize yourself with the prevailing financial landscape in the country. , usually through a financial advisor and consultant. More generally, adults just starting their careers often work hard to achieve their dream of owning a home, which means taking out a large long-term loan that spans 20-30 years. Repaying these is usually a complicated matter, as owning a home entails additional costs such as property tax, home insurance, etc., which are taken into account when calculating the estimated monthly payment. .

Continue with EMI or Prepay?

It therefore remains to know whether to repay the loans monthly after retirement or to dig into the corpus of retirement to repay the loan in advance. Retirees with a well-planned retirement fund may have no trouble paying monthly mortgage payments. However, someone on the verge of retirement can 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 unexpected expenses, while maintaining a lifestyle best suited to their needs.

Keep the retirement fund intact

As a general rule, it is not advisable to withdraw funds reserved for retirement. If a person withdraws from a pension plan 6 months before turning 60, they incur tax deductions and penalties for early payment. Funding mortgage payments at the expense of pension plans can put undue pressure on a person, taking away their financial security after retirement. Although the benefit a person gets from having paid off home loans before their official retirement, it might not allow them to maintain the desired lifestyle due to insufficient funds from reduced income. If the funds can be invested at a higher interest rate than the cost of the loan, it is suggested that you do so.

Repay loans early

A preventative measure that may prove useful is to initiate additional loan payments at an early stage, for example, during the first decade of mortgage use. This can provide a person with the time and funds needed to balance the end of their career, where the burden of loan repayments may be reduced due to anticipated mortgage contributions which decrease the value of the principal and, in turn , reduce the interest charged thereon. . However, in all cases and scenarios, it is preferable not to touch the corpus of retirement, while ensuring a well-conducted financial plan, capable of accommodating both investments for retirement and repayment of mortgages.

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