Need Rs 1 lakh urgently and thinking about dipping into your retirement savings? It might seem a quick fix at 30, but pulling out that Rs 1 lakh could end up costing you around Rs 30 lakh by the time you hit 60. Sure, the compounding can turn your small retirement contribution into a hefty sum over the years , but even a small withdrawal can really hurt its growth. This is why having an emergency fund for those urgent needs is so important.
But first find out how a Rs 1 lakh withdrawal at 30 may cost you around Rs 30 lakh at 60 years of age.
- Age: 30 years
- Retirement age: 60 years
- Withdrawal= Rs 1 lakh
- Expected annualised return= 12%
- Value of Rs 1 lakh in 30 years= Rs 30 lakh (at 12% growth)
You can see that if you withdraw just Rs 1 lakh, it may cost you the principal and Rs 29 lakh of growth on that. But life is uncertain. An emergency may arise even in the best of days. While, dipping into your retirement corpus may not be a good idea, what alternate route can you choose to address your emergency monetary needs?
Future value of withdrawn amount (Rs 1-10 lakh) in 30 years at 12% annualised return
| Current value | Value after 30 years at 12% growth |
| Rs 1 lakh | Rs 30 lakh |
| Rs 2 lakh | Rs 60 lakh |
| Rs 3 lakh | Rs 90 lakh |
| Rs 4 lakh | Rs 1.2 crore |
| Rs 5 lakh | Rs 1.5 crore |
| Rs 6 lakh | Rs 1.8 crore |
| Rs 7 lakh | Rs 2.1 crore |
| Rs 8 lakh | Rs 2.4 crore |
| Rs 9 lakh | Rs 2.7 crore |
| Rs 10 lakh | Rs 3 crore |
Raj Khosla, founder & managing director, MyMoneyMantra.com, pointed out to ET Wealth Online that an emergency is an unplanned situation that may arrive anytime unexpectedly and threaten your health, livelihood, career, and security. Some of the examples Khosla cites are job loss, medical emergency, urgent car repair, unavoidable home repairs, emergency, etc.
Is it justified to withdraw from retirement savings for emergencies?
Gurmeet Singh Chawla, managing director, Master Portfolio Services Limited, told ET Wealth Online that only a few emergencies may justify a partial withdrawal from the retirement corpus, but one should be prepared with separate savings and investments.
“A life-threatening medical emergency may justify a partial withdrawal, as may long-term unemployment after exhausting all other resources. But planned expenses such as home loan down payment, wedding, car purchase, vacation are generally not justification for a partial withdrawal. These goals should be funded through separate savings and investment,” says Chawla.
Citing an example, Chawla says If an investor withdraws Rs 1 lakh at age 30 from a retirement corpus, it can be down by nearly Rs 30 lakh by the time they turn 60.
“The Rs 1 lakh withdrawn is not the loss, it is wealth that could have been created by that amount over the next three decades,” says Chawla.
Khosla says if the expense can’t wait and you have quick access to your retirement fund, you can consider using it.
However, he suggests that you should always compare the net gain of investment against the cost of loan.
“A low-cost loan might be a better alternative to breaking long-term savings,” suggest Khosla.
But then if you suddenly need Rs 1 lakh and don’t have any friend or family member to take help from, what could be the alternative way?
Experts recommend emergency funds for immediate needs
Chawla says one needs to have an emergency fund and for short-term needs, they can keep their money in savings accounts, liquid funds, FDs, etc.
“In emergencies, the first source of fund should be an emergency fund, as it is meant for unforeseen expenses. If that is not sufficient, the next best option is extra money in a savings account or investments in liquid funds, which provide quick access to cash with minimal impact on long-term financial objectives,” says Chawla.
Chawla suggests that one can also look at short-term debt investments or fixed deposits depending on the costs or penalties on withdrawal.
Khosla opines that during emergencies, one can first withdraw from their savings account, then from their emergency fund (sweep-in FD) and finally liquid funds.
Many experts suggest keeping at least six months of monthly expenses in the form of an emergency fund. Having a cushion of six months to two years can help one avoid withdrawing from their retirement fund during emergencies.
A savings account offers instant accessibility to funds through automated teller machine (ATM), Unified Payments of India (UPI) or net banking.
A sweep-in FD can also be redeemed almost immediately.
Liquid funds take 1 to 2 business days for redemption (some platforms may offer instant redemption for a smaller amount), and using this fund is ideal if you need some amount immediately, says Khosla.
Liquid mutual funds generally offer a higher pre-tax return compared to saving accounts. However, one also needs to check exit loads for the specific fund.
Thus, you can see that one should make their best efforts to keep the retirement fund untouched for emergency needs. They should create an emergency of six months to two years in low-risk instruments which provide an easy access to their emergency fund.
