It is not easy to repay a loan, especially, if the amount of the liability is large. The burden of a loan is such that everyone wants to get rid of it quickly, so much so that many people dip into their retirement corpus to repay the loan on time or prepay the loan to escape the burden of added interest synonymous with a prolonged loan tenure.
However, is spending your retirement savings to repay the loan worth the risk considering how you had accumulated the amount to take care of the golden years of your life?
Retirement is not all about complete absence from work and being carefree about the later stages of your life. This stage also means the absence of regular income, which is why you must be careful before spending all your money on anything.
Many people use their retirement savings to close their debt before they retire. However, this may backfire in the long run. The following reasons will help you understand the cons of paying off your debt with the money you had saved for the remaining years of your life.
You will have a dent in your retirement fund
“All expenses and no income” will only worsen your post-retirement financial condition. While getting rid of your loan is not bad, depleting your retirement corpus may cause you to spend the rest of your life in a severe financial crunch. You may consider supplementing your income through passive income means. However, with growing age, working extra might prove to be difficult owing to age-related factors.
Deviating from your financial goals
You just did not accumulate the corpus without planning. It is obvious that you had saved and invested with a financial goal in mind. Depleting your corpus means that you will have to compromise on your lifestyle expenses and find alternative ways to pay your medical bills. Inflation has already caused treatment expenses to skyrocket, which means that you will have to pay more toward hospitalization and medical bills than what you spend now. Decreasing your corpus will make it difficult for you to seek the best possible treatment or necessary medicines to treat old-age diseases.
Losing out on tax benefits
Has anyone told you that prepaying your loan means that you will no more be able to avail of the tax benefits available under various sections of the Income Tax Act, 1961? Home loan borrowers avail of dual tax benefits on both the principal and interest under Section 80C and Section 24 of the Act. They continue to avail of the tax benefits as long they continue to repay the loan amount. This allows them to not only save on the loan repaid but continue to leave their retirement corpus untouched.
Instead of disturbing your retirement fund, you may consider the following ways to repay your debt quickly.
- Look for a passive income source that allows you to prepay your loan.
- Liquidate some of your mutual fund investments to repay the loan.
- Move loan to another lender offering a lower interest rate
- Cut down on unnecessary expenses to save more money and repay the loan quickly.
There is nothing wrong with taking a loan provided it is affordable and within your repaying ability. Once you have incurred a debt, prioritize repaying it over other expenses.