When planning for retirement, most people focus on how much to invest and what returns they can earn. Unfortunately, many don't pay enough attention to inflation. That oversight can prove expensive.
In fact, underestimating inflation by just one percentage point over a working lifetime can erode your retirement savings by as much as Rs 1 crore, sometimes even more.
Inflation is the silent thief that erodes your purchasing power over time, yet many Indians underestimate its impact when planning for retirement.
Calculating your retirement needs is not simply a matter of adding up today's expenses. Inflation steadily pushes up the cost of essentials such as food, power bills and medical care. It is important to weigh how long the money may need to last, how investments are likely to perform and the possibility of unexpected expenses along the way.
For example, if you are a 25-year-old and you aim to retire at the age of 60, you have 35 years left before retirement. If your current monthly expenses are Rs 30,000 and the annual inflation rate is 5%, the same cost at the time of retirement will amount to Rs 1.65 lakh.
We have illustrated how much the future projection of your current costs can vary with an example:
Case 1: Inflation At 3%
Value of monthly expense: Rs 50,000
Inflation Rate: 3%
Time Duration: 35 years
Future Cost: Rs 1.41 lakh
Case 2: Inflation At 4%
Value of monthly expense: Rs 50,000
Inflation Rate: 4%
Time Duration: 35 years
Future Cost: Rs 1.97 lakh
Case 3: Inflation At 5%
Value of current expense: Rs 50,000
Inflation Rate: 5%
Time Duration: 35 years
Future Cost: Rs 2.76 lakh
A modest change in inflation assumptions can dramatically alter retirement needs.
For someone spending Rs 30,000 a month today, the required nest egg varies sharply depending on future price rises: roughly Rs 1.58 crore if inflation averages 3%, rising to Rs 2.34 crore at 4%, and ballooning to about Rs 3.48 crore if inflation runs at 5%.
The numbers rise sharply as spending increases. For a person with current monthly outgoings of Rs 40,000, long-term inflation assumptions make a significant difference: pointing to a retirement corpus of over Rs 2 crore at 3% inflation, Rs 3.13 crore at 4%, and nearly Rs 4.64 crore if inflation averages 5%.
Higher household spending significantly raises the bar for retirement savings. Based on present outgoings of Rs 50,000 a month, projections suggest a corpus of over Rs 2.6 crore under a 3% inflation scenario. A 4% assumption lifts the requirement to nearly Rs 4 crore, and at 5%, the number swells to approximately Rs 6 crore.
To conclude, in India, we often look at the Consumer Price Index (CPI) to gauge inflation. However, your personal inflation rate is likely much higher. As you earn more, you spend more on comfort. This isn't captured in national statistics.
If you have children or have a penchant for international holidays, you will experience price hikes in certain specific sectors which will be steeper than the price of fuel or other commodities.
Also Read: Rs 50,000 Monthly Salary? Here's How EPFO Can Build You A Rs 2.5-Crore Corpus
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