Never dip into retirement funds for other needs

Last Updated: Sun, Jun 30, 2013 06:52 hrs

Your daughter has got admission to an Ivy league college in USA. But due to the fall in the rupee the budget has gone up by Rs 2 lakh. You withdraw from your EPF to make up the shortage. After all, your money is her money. But don't forget, it is money saved for your retirement.

For those who have children, it is children's education that gains precedence. Parents will do anything to give the best education to their children. Education has become an expensive affair. Even the regular school education is expensive today. In cities, the fee per month ranges from a low of Rs 3,000 to Rs 10,000 or more. In international schools or residential schools, the annual fees could be Rs 3 lakh upwards.

These are tuition fees alone. Other expenses like books, stationery, transport, activities, events etc. can push up the costs, to rarefied levels. Suffice to say that education is expensive. For those with more than one child, the expenses become a drag.

School expenses are nothing compared to college expenses. If it a professional degree that one aspires for their child, the expenses balloon to a massive figure. The education inflation is anywhere between 10-15 per cent, which is a worrisome reality. This is causing havoc in the education funding, as it is rising at such an alarming rate. There are other parents who want to give their child a big head-start in life by giving them an education abroad. Parents are willing to make the sacrifices necessary to make these happen.

The other important goal is children's wedding. Every parent wants to conduct the wedding in grand style, irrespective of the resources at their command. Ironically, there is a major prestige element attached to conducting a lavish wedding. Many times wedding expenses exceed what the parents initially planned to spend. In such cases, often parents use up their retirement corpus and even take loans to conduct the weddings in style.

The other important goal that most have, is a home. There is huge pressure to have one's own home. With real estate prices firmly stuck in stratosphere, the common man had to pull out all stops before they could get into their modest dwelling place. A huge loan and a massively depleted savings (which include withdrawals from Employee Provident Fund) are normal consequences. The loan repayments happen over the years, depressing the savings potential for years and the depleted Employment Provident Fund would now no longer be a bankable fallback, for retirement funding.

These are some of the most common goals most people have and are not willing to compromise on. As a consequence, the one goal that becomes the victim is the retirement funding goal.

People think they can somehow pull on during retirement. With rising life expectancy, on an average most people can expect to live up to three decades after their active working life. Medical expenses in this period can be high too. Chances of going back to working and earning more during this period are very slim. Hence, without a good corpus, it is just not possible to pull on in retirement.

So, what is the antidote to the problem of all other goals devouring the retirement corpus? There can be many -
  • Firstly, delineate funds for important goals and stay within that budget. Marriage or education should be funded within the budgets planned. If they overshoot, the funds earmarked for other goals of lower priority, like holidays, holiday home, vacation abroad and so on should be used - not the retirement corpus.
  • Invest the retirement corpus itself in long-term funding investments like Public Provident Fund and New Pension Scheme (NPS). NPS is particularly good as the funds cannot be tapped into, till age 60. Due to this, beneficial compounding can happen over long periods.
  • Explore all options to fund goals. For instance, education funding can be done by a combination of education loans and funding by the parent. Education loans can be paid off by the child once he or she gets a job. The student also gets a tax break on the interest paid and, hence, this loan turns out to be a good low cost source of funding the education.
  • Funding education abroad can be done in four ways. The student should look at education loans, scholarship where possible and part-time employment while studying. The funding by parents should be over and above this, which will substantially reduce the burden on them.
  • Where retirement funding falls short, one should explore the possibility of selling off one's home and relocate to another home in a cheaper place. For instance, selling one's home in a city and relocating to a small town ensures that one has spare funds, a home to live in and a good quality of life at lower prices.
  • Those who have land and second homes can look at the possibility of disposing them off, to augment their corpus and income, in the retirement years. Being sentimental about one's property is not a practical stance. Also, wanting to pass on the property to their children should not be at the cost of one's own secure retirement.

Retirement should be a time of peace, tranquillity and enjoyment. One should take care that nothing jeopardises the security in the golden years. Not even the other cherished goals.

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