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Alternatives to Borrowing from Your Retirement Fund

By Bajaj Markets - Apr 12,2022
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You spend months or years trying to form the habit of diligently saving and investing. Suddenly, a major expense threatens the delicate balance of your investments. Unfortunately, your emergency fund is falling short; incidentally, increasing the intensity of the situation. 

What do you do? Choose wisely. 

a) Dip into your retirement funds (After all, you have plenty of time until retirement!) 

b) Look for alternative funds 

If you chose option b, congratulations are in order. You likely will have a healthy and secure retirement fund waiting for your silver years. However, for those who chose option a – terrible news awaits. 

Also Read: How Much Money Do You Need to Retire Comfortably

Consequences of Early Retirement Fund Withdrawals 

The overwhelming urge to pinch money from your retirement funds may be tempting, but this is detrimental. You could lose the power of compounding by depleting the funds or be charged penalties for early withdrawals. Furthermore, early payouts could be liable for tax deductions. 

Premature withdrawals may only provide temporary solutions to your problems. Look at the different regulations retirement schemes put out for early payouts. 

  1. National Pension Scheme (NPS): Withdrawal is allowed 3 times during the tenure, up to 25% for every request; provided the reason for payout meets the eligible situational criteria
  2. Public Provident Fund (PPF): Once a year, you can withdraw 50% of the account balance at the end of the 4th year
  3. Pradhan Mantri Vaya Vandana Yojana (PMVVY): In case of critical illness, you can receive 98% of the invested principal, and the other 2% is charged as a penalty for early foreclosure

In case of loss of job, or other financial uncertainties, you may not be able to make up for the withdrawal. It makes early payouts a risky move, especially if you start saving for retirement at a later stage.

Though, you can take precautions to prevent this from happening.

Pre-plan for future expenses by investing in funds that will mature in regular intervals of your preference. They will provide you with funds for different stages of your life. Such provisions will keep you from eating into your retirement funds. 

Alternatives for Premature Withdrawals 

Precariously taking out funds from your retirement schemes is unadvisable. Consider trying out the following avenues: 

Try Out Credit Cards

While this may seem intimidating, credit cards can prove to be lifesaving instruments. When sudden financial emergencies occur, use a credit card, preferably with low-interest rates, to pay off incoming expenses. However, ensure that you pay back the amount owed before accruing any interest.

Apply for Personal Loans 

For hefty expenses beyond the means of credit cards, you might want a Personal Loan. An unsecured Personal Loan is ideal for urgent monetary requirements. Post-approval, the loan amount is disbursed within a day or two. 

Depending on the lender, you may receive the amount on the same day. If you don’t have any assets for collateral, this is a viable option for you. 

Loan Against Life Insurance Policies 

Your life insurance may come in handy even before your demise. Some lenders provide you with the benefit of applying for loans against Life Insurance policies, with interest rates between 10.50% to 12.50%. Failure to pay back your debt will result in a reduced sum assured for your beneficiaries. 

Home Equity Line of Credit (HELOC)

HELOC is an alternative for those who own real estate, regardless of whether it’s a residential or non-residential property. This is a type of consumer debt, which is also known as an equity loan. The loan amount sanctioned will convert the equity on your home into cash.  

Avail a Loan Against Property

Most people associate HELOCs and loans against property synonymously. A loan against a property makes you eligible to receive up to 90% of the mark value for your property. 

With options like these available, don’t go diving into your retirement funds! Secure your vulnerable years with a cleverly devised retirement plan. 

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