Succeeding in investing your retirement when you have a mortgage to repay

Retirement investing is one of those goals that, because it’s out of the time horizon, can be pushed into the background in the face of life’s changing priorities. Whether it’s a sudden requirement that triggers a change in income levels or a feeling of being overwhelmed by material distractions, most of us know the phase when investing for retirement is pushed back to the back burner. On the other hand, sometimes, even if you have your eye on the goal of building a retirement pot, you may find yourself unequipped to stay committed to your goal due to debt.

One such case where investing regularly for retirement can get tricky is when you’ve taken out a home loan. Home loans are expensive loans and you may have to divert a significant portion of your monthly income to your EMI payments, which can prevent you from balancing your savings and investments. In such a scenario, you may not be able to pay as much attention to retirement investing as you should.

“Last year, we took out a home loan with a repayment term of 15 years. We had thought carefully about the impact this would have on our expenses and financial goals before we received the loan. Despite this, some months it becomes difficult to run the show without any hitches, as leaks due to unforeseen circumstances are inevitable from time to time. Our budget rules have become stricter so that our savings and investments are less impacted,” says Suresh Ajmani, a 38-year-old businessman based in Kanpur.

Anant Ladha, Founder of Invest Aaj for Kal, says, “If you are considering a home loan, consider the rule – 5-20-25-40. Your home loan must not exceed 5 times your annual income, the term of the loan must not exceed 20 years, the EMIs of your home loan must not exceed 25% of your salary, and the total EMI must at no time exceed 40% of your salary.

Considering that many investors struggle to have a clear idea of ​​the extent to which they should rely on loans to buy a home, Ladha recommends a formula: “Before taking out a home loan, always consider having at least six times your monthly expenses in an emergency fund, investments equal to or greater than 20% of the value of your home and finally you need to ensure that even after paying EMIs you should be able to invest 25% of your total income for your Goals.

The juggling act

Ajmani thinks that while juggling everything financially after taking out a big loan can seem daunting, a little mindfulness can go a long way in keeping you on track. “The idea is the best use of monetary resources at any given time – for example, mindlessly trying to prepay the home loan in spurts every time you have a surplus, won’t do you much good in the long run. However, it is of the utmost importance to keep abreast of credit card debt and personal loans, as these generally bear higher interest than home loans and left to accumulate can create a financial breach.

The opportunity cost conundrum

Ladha agrees that you shouldn’t be too enticed by the idea of ​​mindlessly pumping some of your income each month into EMI refunds in hopes of early repayment. He explains, “An understanding of opportunity cost can be very helpful when paying off your home loan. Suppose you received a lump sum in the form of a gratuity or bonus. Two options are available to you: you can either partially repay your home loan or what remains outstanding, or invest the capital in a financial instrument to earn returns. You need to analyze the opportunity cost of using the money that goes into repayment before making this decision – for example if you have an outstanding loan of Rs. 5 lakh at 10% interest rate per year, you can choose to pay off the loan and live a debt-free life or invest the money in a product that earns you at least 13% per year. So the opportunity cost of repaying the loan, in this case, is the extra gain that you will unfortunately have to give up. Also consider the deduction of interest on your home loan in income tax when making these calculations.

Ajmani says, “I had to reduce my EMI slightly because initially they constituted a very high proportion of my monthly income. I was struggling to invest in my goals and realized it wasn’t sustainable. Not having an investable surplus each month is a risky business because you are basically living paycheck to paycheck and in an emergency you could find yourself in a situation where you might not even repay your loans. .

Plan your retirement

Preeti Zende, Founder of Apna Dhan Financial Services, says, “Retirement is the only financial goal a corpus would be spent on in decades! But often, short-term goals like buying a house or building a reservoir for the children’s education take center stage, and planning for retirement falls to the bottom of the priority list. . That’s why it’s important to start investing for retirement early – you’ll have more time and you can build up a large body and use the power of compounding by investing small amounts.

Zende recommends a combination of different types of mutual funds with an asset allocation formula based on an individual’s risk-taking capacity to comfortably build the retirement pot while you pay off your home loan. “A combination of different financial products for retirement planning can enable better risk management and better asset diversification. Equity mutual funds as well as the Employees Provident Fund (EPF), Public Provident Fund (PPF) and National Pension Scheme (NPS) can be used for retirement planning.

Explaining further, she says, “You can build a stock portfolio based on the core and satellite approach. You can have 50% exposure in Nifty index funds or large-cap funds, 30% in high-rated flexicap funds, and 20% in mid-cap mutual funds. One can have a good combination of passive and active investment strategies to reduce the cost and maximize the return. You can opt for Nifty 50 as well as Nifty Next 50 with an active Flexicap fund. Alternatively, you can also opt for Nifty 50 as passive funds and flexicap and midcap as active funds. The choice of combination depends on its ability to take risks.

action points

  • Make sure you have adequate health and life insurance coverage for your dependents. This will help you get through any emergencies with minimal disruption to your overall financial health.
  • If you’re in the habit of setting aside money for your emergency fund, keep doing it, as this corpus can help you deal with any unexpected upheaval that your insurance may not be able to help you with. protect.

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

About Joan Dow

Check Also

What canceling a student loan could mean for your budget

(NerdWallet) — The Biden administration announced federal student loan relief plans last month. The plans …