Long-term investing through a Systematic Investment Plan (SIP) in mutual funds seems like a smart financial decision. You earn, save, invest your money every month and hope it will grow meaningfully to sustain your retirement years. However, many investors overlook a key factor in investments: impact of inflation.
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Today, it might seem that an amount like Rs 5 crore is a lot and can meaningfully sustain retirement. However, after 25 years, the same Rs 5 crore may not have enough purchasing power. This means that you can run out of your corpus faster than expected.
Purchasing power of Rs 5 crore:
Initial amount: Rs 5 crore
Inflation: 6%
Time: 25 years
Future cost: Rs 21,45,93,536
Price increase due to inflation: Rs 16,45,93,536
This means that a retirement corpus of Rs 5 crore today would need to grow to approximately Rs 21.46 crore over the next 25 years to maintain the same purchasing power, assuming 6% annual inflation. Effectively, if you are hoping to retire with a Rs 5 crore corpus after 25 years, it would be worth around Rs 1.16 crore in today's money.
So, you need to think that if you were to retire today with Rs 1.16 crore, would it sustain your retirement?
The answer to this question is not a simple one. Retirement lifestyle can be influenced by many factors, depending on hobbies, personal goals, etc. As a general rule, many people measure their retirement expenses by multiplying their current expenses by around 25.
This means that if your current expenses are Rs 10 lakh per year:
Estimated retirement corpus based on 4% withdrawal rate: Rs 10 lakh x 25 = Rs 2.5 crore
This means that to sustain your current lifestyle, you need about Rs 2.5 crore (in today's value) during your retirement years.
The purchasing power of Rs 2.5 crore after 25 years:
Current annual expenses: Rs 10 lakh
Target corpus using the 25x rule: Rs 2.5 crore
Assumed annual inflation: 6%
Time horizon: 25 years
Inflation-adjusted target corpus: Rs 10.73 crore
This means that assuming 6% annual inflation over the next 25 years, you may need approximately Rs 10.73 crore to maintain the same purchasing power.
Needed SIP for this corpus:
Target amount: Rs 10.73 crore
SIP amount: Rs 52,697
Investment duration: 25 year
Expected rate of return: 12%
Invested amount: Rs 1,58,09,100
Estimated returns: Rs 8,41,90,576
Total value: Rs 10 crore
While these figures are illustrative, they show how inflation can shrink your corpus over time. Additionally, your withdrawals are also likely to rise every year during retirement, while you will need to ensure that your remaining corpus keeps earning. Retirement can seem like a challenging journey, but with the right strategy it is easy to manage. To optimise your planning, you can also discuss your goals with a certified expert to have a more realistic idea of your long-term financial journey.
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