Why Is It Important To Factor Inflation Into Retirement Planning?

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Inflation: A Key Factor to Consider into Retirement Planning

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  • 27th Aug 2021
  • 353

Inflation: A Key Factor to Consider into Retirement Planning

Investment in a retirement plan can be rewarding in the future only if you plan wisely, keeping in mind all the critical factors. Inflation is one such factor that plays a vital role in analysing your requirements during retirement years.

Let’s understand further the inflation factor and its significance.

What is Inflation?

The inflation percentage signifies the average price change of various goods and services, including food, housing, transport, entertainment, etc., over the year. It indicates the downfall in the purchasing power of a single unit of currency. As inflation increases, this purchasing power of money decreases, thereby making your living expenses go higher.

Why is Inflation a Significant Factor While Planning Your retirement?

Since the value of money decreases with time, it shoots up our expenses every year, which is indicated by the inflation rate. If we look at India’s inflation rate for the last two years, it was 4.76% for 2019 and 6.2% for 2020.

When you plan your retirement, which is 20-30 years ahead, your monthly expenses are expected to be way higher in the future than today if we consider this yearly inflation. Hence, to arrive at an effective estimate of your financial requirements during retirement, you must apply an approximate inflation rate while calculating the retirement corpus.

Let’s understand this with an example.

Your yearly expenses stand at Rs. 2,00,000 for the current year. Assuming a consistent inflation rate of 3% yearly, you will need 2,03,000 Rs to address the same expenses next year. Similarly, it becomes 2,09,090 Rs for the second year. Hence, it keeps on going up every year till your retirement and even beyond, resulting in a whopping amount.

Therefore, without considering the inflation, a retirement savings plan cannot be effective enough to address your finances during retirement years. While the commodities will be inevitably costlier in the future, the medical and healthcare expenses will also be higher by the time you plan to retire. Hence, estimate the future medical costs considering inflation and your age when you may need extra medical care and support.

How to Estimate the Retirement Corpus Using Inflation?

It is convenient and easy to calculate the corpus while including inflation as an important factor, using the online retirement corpus calculators. Most leading banks and financial institutions offering retirement plans provide such calculators on their websites. It takes, as an input, various parameters, such as your current monthly expenses, years left for retirement, expected inflation rate, expected ROI, etc., and generates the corpus figure accordingly. rel=“nofollow” Use Kotak retirement corpus calculator to determine the investment you need to make to meet the financial goals by the time you retire.

Without a proper estimation of the corpus, a retirement plan may fail to support you financially during your retirement years. You can use the various online resources to compare the different plans, know the terms and conditions and make an informed purchase decision. Additionally, investing in a retirement plan online is easy; you can do it from the comfort of your home and stay on top of the investments.

- A Consumer Education Initiative series by Kotak Life

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