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Inflation: A Key Factor to Consider into Retirement Planning

Inflation is a factor that plays a vital role in analyzing your requirements during retirement years. To understand the inflation factor and its significance, read this blog ahead.

  • 2,250 Views | Updated on: Mar 18, 2024

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 analyzing your requirements during retirement years.

Key Takeaways

  • Inflation is the depreciation of the purchasing power of money over time.
  • Inflation can significantly impact retirement planning, as it can erode the worth of savings and investments over time.
  • There are a number of ways to mitigate the impact of inflation on retirement planning, such as asset allocation, diversification, and regular adjustments.
  • Online retirement corpus calculators can be used to estimate the amount of money you need to save for retirement, taking inflation into account.

A retirement investment plan is a complex and critical endeavor that requires careful consideration of various financial variables. Among these, inflation stands as a key factor that holds substantial implications for the long-term sustainability of one’s retirement portfolio. As the relentless force erodes money’s purchasing power over time, inflation demands astute attention when devising a retirement strategy. Let us understand further the inflation factor and its significance with this blog.

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 increasing your living expenses.

Why Inflation is Particularly Relevant in India?

India has a history of moderate to high inflation rates. Factors such as population growth, supply-demand imbalances, and fluctuations in oil prices contribute to inflation volatility. Over the past few decades, India’s average inflation rate has been around 6-7%,although it has shown fluctuations.

Inflation can profoundly impact retirees in India due to the long life expectancy and increasing healthcare costs. As individuals age, their healthcare needs tend to rise, and medical inflation often outpaces the general inflation rate. Failing to account for this can result in a substantial financial burden during retirement.

Why is Inflation a Significant Factor While Planning Your retirement?

One of the most evident consequences of inflation is that it diminishes the real value of money. This translates to reduced purchasing power and an increased strain on retirees’ ability to maintain their desired standard of living. In the context of retirement planning, failing to consider inflation could result in the premature depletion of savings and investments, leaving retirees financially vulnerable during their later years.

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% in 2019 and 6.7% in 2022.

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, you must apply an approximate inflation rate while calculating the retirement corpus to arrive at an effective estimate of your financial requirements during retirement.

Let us understand this with an example.

Your yearly expenses stand at ₹2,00,000 for the current year. Assuming a consistent inflation rate of 3% yearly, you will need ₹2,03,000 to address the same expenses next year. Similarly, it becomes ₹2,09,090 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 inflation, a retirement savings plan cannot be effective enough to address your finances during your retirement years. While the commodities will inevitably be 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.

Mitigating the Impact of Inflation on Retirement Corpus

Retirees can take proactive steps to safeguard their financial security by understanding the potential challenges posed by inflation. These strategies revolve around creating a diversified portfolio that is designed to withstand the erosive effects of inflation. Some key considerations include:

Asset Allocation

A well-balanced portfolio that has a mix of equities, bonds, and other assets can provide a buffer against inflation. Historically, stocks have demonstrated the ability to outpace inflation, helping to preserve purchasing power.

Diversification

Investing in various asset classes and sectors can provide a layer of protection against the adverse impacts of inflation on specific industries.

Regular Adjustments

Periodic reassessment of one’s retirement plan is crucial. Adjustments can help retirees gauge whether their investment strategies effectively account for inflation and meet their financial goals.

Professional Guidance

Consulting with financial advisors specializing in retirement planning can provide retirees with tailored strategies aligned with their individual goals and risk tolerances.

Delay Social Security Benefits

In India, retirement investment options include the Employees’ Provident Fund (EPF), which is a form of social security. Delaying withdrawals from EPF can allow your retirement savings to potentially grow faster than inflation, providing a more secure financial cushion.

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 online retirement corpus calculators. Most leading banks and financial institutions offering retirement plans provide such calculators on their websites. As an input, it takes various parameters, such as your current monthly expenses, years left for retirement, expected inflation rate, expected ROI, etc., and generates the corpus figure accordingly.

Final Thoughts

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.

FAQs

1

What is a reasonable inflation rate to consider in my retirement planning?

In India, historical inflation rates have averaged around 6-7%. It’s wise to consider this range when projecting future expenses.

2

How often should I adjust my retirement strategy to account for inflation?

Reviewing your retirement strategy annually and whenever significant life events occur is advisable. Regular assessments will help ensure your plan remains on track to account for changing economic conditions and personal circumstances.

3

Is it too late to start preparing for retirement if I’m nearing retirement age?

While it’s ideal to start retirement planning early, it’s never too late to begin. Adjustments to your savings rate, investment strategy, and retirement goals might be necessary, but even a late start can positively impact your financial future.

4

Are there specific sectors or assets that perform well during inflationary periods?

Historically, equities (stocks) have outperformed inflation over the long term. Certain commodities like gold and real estate can also act as hedges against inflation.

- A Consumer Education Initiative series by Kotak Life

Amit Raje
Written By :
Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Amit Raje
Reviewed By :
Prasad Pimple

Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors

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