It is not unusual to have debt at the time of retirement in present times. Or it may not remain so in the near future.
The reasons are multifarious.
1. Moratorium and Debt Restructuring
The EMI moratorium scheme of 2020 attracts flak for good reasons.
Borrowers with a reduced income expected relief from debt obligations.
However, the scheme did not offer a waiver of EMIs or interest. It only offered an extended time frame.
The net effect is a higher interest outgo in the long run.
Debt Restructuring is nothing but an extension of the period of loan. Bankers re-calculate EMI in line with the repaying capacity. The net result is the same as above – a higher interest burden on the borrower’s pockets.
2. Early Retirement or Career Break
This can be forced or voluntary. Job loss at 50+ effectively becomes early retirement. The chances of finding employment again at the same level and profile are bleak.
People (many of them women) have voluntarily quit jobs to manage parenting or caregiving roles, without external support of creches and nursing assistants.
3. Emergency loans for medical expenditure
Some people availed loans against assets or withdrew from provident fund, to meet emergent medical expenses in the family during the pandemic.
4. Stopping systematic investment plan contributions
People chose to stop SIPs in order to pay loan instalments, or build an emergency fund.
5. Loss of an earning family member
The emotional loss is devastating. And needless to say, if the deceased member was young, financial life of the family has changed forever.
6. Increased insurance premiums
We see the need for Insurance in a fresh light, and people are opting for enhanced covers. Family members not adequately or previously covered are now brought under the insurance umbrella.
Pandemic insecurity leads to this mental state. It also diverts funds from investments to insurance.
HOW DOES IT AFFECT RETIREMENT PLANS AND DEBT MANAGEMENT?
The assumptions made at the time of planning have changed. Hence, the retirement corpus will not remain the same.
- Stopping SIPs destroys the compounding benefit one gets, if markets remain benevolent.
- Withdrawal from Provident fund effectively reduces the retirement corpus.
- Extension of the tenor of loans means that loans can extend beyond retirement age.
- Early retirement means income levels are below those assumed, when the plan was drawn out.
- Loss of an earning member means all planning needs to be done afresh. The family will receive a lump sum amount of terminal benefit and insurance money, but asset allocation needs to be change, as income level in future will not be the same.
- Using terminal benefits to settle a loan reduces the size of retirement corpus, and exposes one to the risk of inflation in later years.
TO WHAT EXTENT DO GOVERNMENT SCHEMES HELP?
Government schemes help to a limited extent, and have their own pros and cons.
Examples are extension of entry age in National Pension Scheme, or waiver of compound interest for those who have availed of EMI moratorium in the period Mar’20 to Aug’20.
The impact on each individual or family is different.
There is no guarantee on how long the schemes will continue, or benefits accrue. The window may close at any time.
Government schemes may do nothing to help the problem of debt at the time of retirement.
WHAT CAN ONE DO TO DEAL WITH DEBT AT THE TIME OF RETIREMENT?
- If you still have a couple of years to go, use enhanced savings to become debt-free, rather than use money from retirement funds.
- Allocate more funds to low-return annuity plans in order to increase the monthly inflow needed to pay EMIs.
- Consider selling a large house and moving to a smaller one, or one in the suburbs or Tier 2 or 3 cities to release funds for subsistence during retirement.
- Pay expensive debt like credit cards and personal loans in full before retirement.
- If a home loan continues, calculate tax benefits afresh, if you are still in the tax bracket. The outstanding amount in a home loan towards the fag end is largely the principal amount. The exemption under 80C for payment of principal is Rs. 1.5 lakhs, and not Rs. 2 lakhs as one gets for interest payment.
- Accept extension of service granted post-retirement, alternate employment, freelancing or consulting, or use a hobby or passion to generate money to create a funds inflow. You don’t have to fall back on retirement funds immediately.
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