There are risks associated with startups and hence it is not advisable to use your retirement corpus to fund them
Are you planning to retire early and start your own venture but are finding it tough to locate seed capital? In such a situation, should you think of withdrawal of your retirement corpus in your public provident fund (PPF) or use the EPF accumulation on retirement to fund your startup?
Using retirement money for risky investments could be fraught with danger. Financial planners feel that doing so might expose you to an uncertain financial life during your later life.
“The retirement corpus accumulated through PPF or EPF over the years, as the name suggests, ideally should be used only for one’s retirement. Risky enterprises like startups where there is no clarity on the success of the venture or about the business growth are not avenues where retirement corpus should be used,” Chitra Iyer, COO, HappynessFactory.in says.
EPF and PPF accounts help substitute the income from salary that stops after retirement and provides a monthly income that is needed to meet monthly family expenses.
Iyer points out that returns from startups could be sporadic and there are duration commitments before which returns can be expected. Further, there is a high risk of return of capital when such businesses do not take off at all. The cash burn in such new setups are high and is risky.
“Although the law allows you to withdraw a portion of your retirement corpus for specific reasons like marriage, medical emergency, education needs etc it is advisable to refrain from doing so unless it is absolutely necessary. Besides, there are rules on time frame and limits of sums that could be withdrawn from Public Provident Funds corpus. Also, taxes are applicable on premature withdrawal from Employees Provident Fund,” Iyer said.
S Sridharan, Business Head, Financial Planning, Wealth Ladder Investment Advisors, says anyone considering quitting a job and venturing off on one’s own should make sure that future goals like education of children and retirement income are taken care of. Also one should create a fund for household needs for a period of time before taking the plunge.“One should identify and separate their personal needs and official needs. They should set aside 36 months of household expenses to make sure that your family does not suffer,” he said.