17 Jul Should You Borrow from Retirement to Pay Off Debt?

Posted at 10:19h in Latest News by

Have you ever thought of borrowing from your retirement fund to pay off debt? While this may seem like an alluring option, it’s important to realise that this could have numerous consequences on your financial well-being in the future. It can be hard to envision the future, especially when for some of us, it’s a good 30 to 40 years away.

This post discusses the pros and cons of borrowing from your retirement to fund debt repayments and whether you should apply for debt refinancing.

The Pros

Pensions can seem like they’re free funds you can withdraw to pay off debt. Withdrawing from your retirement funds can be a great way to pay off debt, so long as you replace them. Essentially, it’s like borrowing money from yourself.

The Cons

Research shows that one in three South Africans struggle to retire because they’ve spent their funds prematurely. Moreover, withdrawing funds before they’ve fully matured means you’ll miss out on the powerful effect of compound interest– interest on top of interest– that the government owes you. This effect should not be underestimated. It can have powerful effects on your spending power later on.

It’s also important to note that using your retirement savings does not aid in forming the habit of living under or within your means. You’re taking the easy way out and damaging future financial prospects. Consider tackling debt short term with measures like debt review and debt consolidation, as well as budgeting better to keep your retirement fund healthy and strong. Remember, if you do cash out on your retirement savings, you’ll have to pay cash on a lump sum.

Should you borrow from retirement to pay off debt?

Plan for The Future

We can’t stress this enough–retirement planning is integral to your well-being. Imagine not being able to meet living expenses when you finally turn 60. You’ll resent your younger self for your shortsightedness and impulsive spending.

You should start retirement planning as soon as you possibly can and 5 years before you plan to retire at the latest.

Think of everything that could happen to you in a mere 5 years:

  • Becoming disabled
  • Developing long-term or chronic illness
  • Becoming overindebted
  • Retrenchment
  • You could die

There are many aspects to take into account before you start planning for retirement. Some of these things include:

  • The amount of money your dependants need to live off for X years
  • Whether you would like to leave a legacy through a will
  • If you can afford estate taxes and day-to-day expenses before your life insurance pays off
  • Whether you have non-taxable sources of income to supplement your pension
  • If your mortgage will paid off by the time you retire
  • Provisions for what you would like to achieve during retirement

Should you borrow from your pension to pay off debt?

If you’re in debt with especially high interest rates, think about how much room you could free up in your budget with personal loan interest rates and admin fees. Try debt consolidation today and discover the power of extended repayment periods and low interest. Contact us now.