Impact Of Inflation On Retirement Planning


retirement incomeRemember those childhood days when you could buy an ice candy for less than a rupee or a bar of chocolate for a couple of bucks? Have the companies started increasing their profit margin on these products or is it something else that has taken the price of things through the roof?

This is the long-term impact of inflation on our day to day life. In simple words, inflation can be termed as the rate at which the general level of prices for goods or services increases and, consequently, the purchasing power of currency reduces.

Now imagine how inflation can impact your retirement and other long-term goals when everything becomes more expensive with each passing year but the value of your savings reduces. While inflation typically only increases the cost of goods and services from year to year marginally, it represents a serious risk and challenge for retirement income planning, as its impact is magnified over an extended period of time. A retirement income plan that does not account for inflation and the potential decline of purchasing power could meet your retirement needs early in retirement but will most likely fail to suffice ten to fifteen years into retirement.

While you are working, your wages generally rise as the costs of goods and services increase and your earnings keep pace with inflation. However, when you are living off of savings, inflation literally robs you of your income and reduces the buying power over time. Let’s look at a few scenarios to understand how inflation impacts your retirement savings. Let’s say you need ₹ 1,00,000 a month to maintain your lifestyle today, assuming inflation at a historical average of 7 percent a year, and retirement age as 60:

  • In 10 years, at age 70, you will need ₹ 1,96,715 a month to support the same standard of living

  • ₹ 386,968 a month is the amount of money you’d require in 20 years at age 80

  • And if you happen to live until age 95 (35 years in retirement), you’d need ₹ 10,67,658 a month to support your lifestyle

  • If we increase the inflation rate by just 1 point to 8 percent, then the ₹ 386,968 a month required at 80 becomes ₹ 4,66,096 a month – a rather significant jump

Today, most people don’t believe in compromising on their lifestyle post retirement. In fact, they want to build a corpus that can not only provide for a comfortable retired life but also manage fancies like catering to grandchildren and travelling.

To avoid a cash crunch during your golden years and to ensure a comfortable retirement, keep these two things in mind:

  • Your investments need to increase in value beyond inflation levels so you have the necessary savings to afford all those pricey, but important, products and services needed in future

  • Average life expectancy is increasing now, so you’ll need enough retirement funds to cater to your needs if you were to outlive your planned retirement years

The best advice is to speak with your financial advisor about how you can establish an investment portfolio that can beat inflation and provide you with best chance of investing well now for compounding gains later.

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