A retirement corpus is probably the only way you can support yourself when you cant work anymore
The government has recently paved the way for you to spend up to 90% of Employees' Provident Fund (EPF) money to buy house, and pay the EMI for your home loan. Buying a home can be costly, so spending your retirement money for its down payment may seem attractive, as it will immediately reduce the EMIs.
However, there is a flip-side. If you spend too much of your retirement corpus for 'apna ghar', and don't save much till you hang up your boots, old-age could be financially troublesome, say experts. Not everybody has a government pension, so retirement corpus may be the only way to have a decent living in old-age.
Home costs high: The average price per square feet in Hebbal area of Bengaluru has shot up from Rs 4,250 in 2012 to Rs 7,100 in 2015. Homes in Chembur costing Rs 12,000/square feet now cost upwards of Rs 17,000. Medavakkam in Chennai, Dwarka Expressway & Noida extension in NCR, Tathawade & Wakad in Pune, tell the same story. So, it is natural homes bought on loans lead to heavy EMIs, easily crossing Rs 50,000 a month. This is why people think of innovative ways to lower their loan burden.
But, should you use your EPF money to purchase home? "Its a very bad idea," says Suresh Sadagopan, founder, Ladder7 Financial Advisories.
People tend to go overboard when it comes to their house. A Rs 50-lakh home actually becomes a Rs 60-65 lakh home. "I'm yet to meet a person who has completed his home/ renovation within the originally committed budget. By this move, the government has ensured that the retirement corpus would deplete to a great extent as most people do not realise how important retirement funding as a goal is and the fact that they should not dip into that kitty for anything, including housing," argues Suresh.
A retirement corpus is probably the only way you can support yourself when you cant work anymore. The more time you give to that corpus, the biggest the nest-egg becomes. A Rs 10 lakh in your EPF kitty can become Rs 50 lakh in 20 years if the investment grows by 8.4%.
Do the math: There are some situations where reducing home loan burden may work. Certified Financial Planner Pankaaj Maalde says, "Buying home or upgrading home is one of the most priority goals in India and in metro cities the cost is also too high. If you have the option to withdraw money for down payment or even for more it reduces your burden to pay monthly EMI. This gives financial comfort to the individuals to manage their finances."
If you have enough time to save again for retirement, then paying off debt with EPF money can make sense. Maalde says the retirement money should be mostly in equities, because they have the potential to earn more. "As far as retirement goal is concerned, in most cases it's a very long term goal and for any time horizon of 10 years plus equity is a good investment compared to any debt investment," he added. Debt or fixed income can give you 8-9% annually, while riskier asset equity has the potential to give 12-15% annually over the long-term.
Retirement savings plan: The EPF's move obviously scales up the affordable housing schemes and real estate sector. But there may be very less percentage of individuals who would actually able to withdraw money under the given rules and regulation by the Labour Ministry. But even if you are among the eligible, you need to take a close look at your retirement savings plan.
Rahul Parikh, CEO, Bajaj Capital says that using the EPF amount to pay the down payment of the new house would not be advisable unless an individual has already planned his retirement with other inflation beating investment options. In India, one of the major sources of generating retirement corpus for an individual is EPF.
"This is because the contribution to employer EPF is restricted to 12% of monthly basic salary which tends individual to keep this money for post-retirement life. Reducing this amount to a large extent will impact retirement corpus as a private employee does not come under any pension schemes as well. It will only be going to add more burden to an individual during their sunset days," cautions Rahul.
WATCH YOUR SAVING
- A retirement corpus is probably the only way you can support yourself when you cant work anymore
- The retirement money should be mostly in equities, because they have the potential to earn more
- Using EPF amount for downpayment should be avoided unless an individual has other options for retirement
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