Avoid dipping into retirement kitty for other goals

Dev Ashish

Till you are well into your 50s, chances are that retirement is not the only financial goal that you are worried about. You have many others—planning the purchase of your first house and children’s higher education (and maybe their marriages too).

These are some of the common goals that most people have. More importantly, these goals are more immediate than retirement, which in most cases is decades away. So the common refrain is why even bother about retirement when it is so far off in the future?

It is indeed tempting to disregard retirement when you are in the initial years of your career. But that should not be done. We will come to it in a bit.

Saving for multiple goals

But let’s be practical. No matter how important retirement savings are, you just cannot ignore planning for other goals. If you don’t plan for them, you will simply end up withdrawing money your retirement corpus (the only saving you have) to fund those goals. This will, without doubt, jeopardize your retirement savings too!

Dipping into your retirement corpus for other goals results in the erosion of your portfolio value.

Let’s take a small example to understand this.

• Suppose at age 30, you start saving Rs 10,000 every month in a portfolio with 50:50 Equity:Debt.
• This monthly investment amount is increased by 10% every second year (in line with your increasing income and savings capability).
• Now, at age 38-39, you decide to buy a house and withdraw Rs 10 lakh for the down payment.
• From age 46-49, your kid’s higher education costs kick in with Rs 5-6 lakh annually for four years. You withdraw this amount too from the retirement corpus.

In total, you would withdraw Rs 32 lakh (for the house down payment & child’s higher education) and still save Rs 1.73 crore for retirement. That’s neat. Right?

Withdrawals can hurt

What if these withdrawals hadn’t been made and the portfolio been allowed to grow as it was?

It would theoretically have grown to Rs 3.34 crore.

See the difference?

Those withdrawals of Rs 32 lakh resulted in the final portfolio being Rs 1.73 crore instead of Rs 3.34 crore, a difference of more than Rs 1.60 crore!

Now you see what the consequences are of dipping into the retirement portfolio and disturbing the process of compounding?

And this is exactly why it’s best to keep the retirement target separate from all other medium-term goals such as house purchase, children’s higher education, etc. It ensures that you give it the undivided attention it deserves.

And this is extremely common in India. Parents withdraw too much for their children’s education and marriage and as a result, the critical goal of retirement savings is compromised.

If proper planning is done then having two separate portfolios, one of retirement and one of all other goals (if not a separate one for each) reduces the chance of over- or under-deploying funds towards one particular goal.

So what is the right way to approach this kind of situation?

- First, understand and accept the fact that you have to keep retirement savings separate from all other goals.

- Find out how much regular savings are required for retirement, children’s education, house down payment, etc.

- If the monthly savings are enough for all the goals, then start saving separately for each one of them. If they are insufficient, you need to prioritize your financial goals and save whatever is available and divide the amount in line with your priorities.

Remember, keeping retirement savings separate from other goals will ensure that you allow your retirement corpus to grow properly without unnecessary withdrawals. You will also know how much more you need to save for other goals. This way, you will be in better control of your financial life.

(The writer is the founder of StableInvestor.com)