We Design Your Financial Destiny


(Precious) Words of Wisdom : "Who is the ideal adviser? A person who likes you but doesn't care about your feelings." ~ Daniel Kahneman

Inflation Is The Biggest Risk In Retirement Planning

Warning: Many people fail to account for inflation, when estimating their retirement corpus.

Suppose, Rs.50,000 per month as living expenses is their target, post retirement. To earn a safe and regular income, they plan to invest their corpus in a bank fixed deposit. Based on the historical trend, one can expect to get around 8% p.a. as interest income.

Thus, to earn Rs.6 lakhs per annum, they work out that a corpus of Rs.75 lakhs would be sufficient for their retirement.

Beware!

Let’s say the retirement is still 15 years away.

Want to retire early? Read The Challenge To Retire Early Before You Turn 50.

It is but natural that after so many years, the cost of living would have shot up. As such, Rs.50,000 p.m. assumed, based on the current standard of living, would most definitely fall short. Even if we consider a moderate annual inflation of 6.5%, the monthly requirement would be almost Rs.1.3 lakhs i.e. about Rs.15.60 lakhs per year.

As you can see, within less than 5 years, the entire corpus would be gone. There would be no money left thereafter.

Of course, some people are intelligent enough to understand this simple truth. So they do account for this increase in cost of living.

To earn Rs.15.60 lakhs p.a., they correctly estimate a sum of Rs.2 crores (and not Rs.75 lakhs) as their retirement target. 

Wait:

This is not the happy ending of this story.

biggest-retirement-blunder
If you slip on the inflation, your retirement could be quite painful.

Inflation is a moving target. 

The above calculation of Rs.15.60 lakhs as monthly requirement (and Rs.2 crores to meet the same), is applicable for the 16th year only.

The prices will keep increasing year after year. So, after few years into retirement, even this Rs.15.60 lakhs as annual interest income will not be sufficient to meet the monthly budgets. 

When we work the numbers, we discover that the entire corpus of Rs.2 crores will be over within about 12 years. After that… zilch income!

If we have to ensure that the money lasts for at least 20 years post retirement, the correct number would be nearly Rs.3 crores. This will protect us against inflation till (probably) the very end.

Must Read : Inflation, Interest Rate and Raghuram Rajan's Dosa Economics

Worried?

The amount  of Rs.3 crores may seem as huge money today. And the threat of inflation too appears really scary.

Don’t worry:

We have an antidote… compounding:

If you invest your monthly savings, 
a) across a well balanced and diversified portfolio (of debt, equity, property, gold), and
b) in a patient and disciplined manner for 15 years  
it is definitely possible to achieve a large enough corpus for the retirement.

(Note: For simplicity purposes, I have ignored income tax in the above calculations. However, you must incorporate that too, to realistically estimate your retirement corpus.)

Despite all your efforts, if you fail to reach the desired target read 20 Ways To Boost Retirement Fund (When You Haven’t Saved Enough).

An Investment In Knowledge Pays The Best Interest ~ Benjamin Franklin

You Learn A Lot By READING... And Even More By SHARING.

Share Button

Ignorance is like a SIGNED BLANK CHEQUE... anyone can MISUSE it.

Subscribe via Email
Powered by Blogger.

... Three VALUABLE Tips ...

1. How Rs.1 Lakh Became Rs.1 Crore In Mutual Fund Scheme
Reliance Growth Fund
Stay invested through all the rough and tough times.

 


2. Guaranteed Income Insurance Plans Misinform Misguide Mislead
Guaranteed Income Insurance Plan
I sincerely hope you spill coffee over guaranteed income insurance form.

 


3. Should You Opt For Home Loan With An Overdraft Facility?
Home Loan With Overdraft Facility
Wondering whether an Overdraft Account linked to Home Loan is Ok or not?