How to plan finances if you are nearing retirement & have debt liabilities?



“In the last couple of years before I hit the retirement milestone, my otherwise deftly planned retirement investment strategy started crumbling. In those years, I had to incur heavy debt due to some unforeseen circumstances which drained my finances. After that tide had thankfully passed, I was faced with the uncomfortable realization that as opposed to focusing on strengthening my retirement corpus in the remaining years of my professional life, I would have to divert my focus on debt repayment,” narrates 63-year-old Rishee Shah (name changed) who was employed as government officer.

Sometimes the vicissitudes of life can blow your best laid retirement plans to smithereens. Exigencies, tragedies, job and income losses or the loss of finances owing to bad money decisions – such events can create a solid dent on your finances regardless of how well-prepared you may have been. In such circumstances, availing debt becomes the last resort for sailing through choppy waters.

In the aftermath of a scenario where you have had to shoulder a high debt burden, your financial goals can be derailed – the higher the liability, the more significant the ripple effect. Sometimes mismanagement of existing debt burdens can also pull you into an abyss which can put your overall financial health at risk. For those nearing retirement, the debt conundrum can hamper their retirement investment strategies.

Elaborating on his experience, Shah says, “My biggest takeaway was that to dabble between debt repayment and retirement investing simultaneously so that you can make the most of the money you have. Many people who are struggling with high EMIs or credit card debts tend to completely stall their retirement plans to focus on being debt-free first. In fact, I had gone down that route as well but eventually I realised tapering off your debt payments starting from the ones carrying the highest interest to the lower interest ones while continuing to pump whatever money you can into your retirement investments can be a better way to ensure your golden years are not jeopardized.”

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To be able to continue your investment plans despite having a high debt burden, it is imperative to draw a sequence of the different debt liabilities and start repaying them depending on their interest rates. Shah narrates, “SIPs in mutual fund investments helped me in substantially reducing my EMI burden. While many people tend to pull the plug on investments to be able to shed off their debt load after having taken loans, a dedicated SIP plan, even if it is of a nominal value, can help in easing up your situation by supplementing your stash that goes into paying interests to the bank or lender.”

For instance, if you have taken a home loan of 25 lakh at an interest rate of 9% per annum for 20 years, the approximate amount that you will have to repay at the end of 20 years stands at 54 lakh and your EMI will be roughly 22,500. Now, an investment of even 0.1 percent of that amount ( 2500) in an equity fund through SIPs which delivers, say, a 12% rate of return, your investment would amount to 24.7 lakh in twenty years and this capital appreciation will significantly neutralize the impact of the high interest rates on your finances. Once you have eliminated the highest interest debt, you can start channelizing more funds into equities to make up for lost capital appreciation opportunities for your retirement. On the other hand investments in short term debt mutual funds and liquid funds can help you stay on track with your short-term goals and ensure your liquidity is not compromised in a bid to be debt-free.

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Sohesh Shah, a partner at InvestRite Advisory says, “ When one is nearing retirement age, capital protection is a prime focus and existing debt burdens should be reduced as much as possible. One also needs to have an emergency bucket ready for any immediate financial needs. Mutual funds can come in handy in such circumstances .You can invest in Liquid funds which can be redeemed immediately for emergency needs while equity savings schemes of mutual funds, can provide capital appreciation and are less volatile to pure equity schemes. Also, returns are better compared to bank fixed deposits/annuity products.”

Key takeaways

– Additional sources of income such as a side hustle can help alleviate your debt situation.

– A good term insurance policy for you and your family is non-negotiable. Not having funds to cover for any emergencies because of high debt burdens can be an excruciating financial situation. When you have a high debt liability, it may become harder to tackle such circumstances without the aegis of an insurance policy.

– Capital protection is a prime focus when one nears retirement age and existing debt burdens should be reduced as much as possible. One also needs to have an emergency bucket ready for any immediate financial needs. Mutual funds can come in handy in such circumstances .

This article is part of the HT Friday Finance series published in association with Aditya Birla Sun Life Mutual Fund.


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