Inflation is an issue on everyone’s mind; not only does inflation increase your cost of living as it it leads to a rise in prices of fuel, groceries, transportation, and bills, in general, but it also reduces the value of the Rupee. A plate of bread-omelette you relished during your college days would probably cost you more 4 years after graduating. Have you ever heard your parents reminisce about watching a film in the 1960s or 70s for a mere ₹ 2 in a theatre? Now, the same experience costs more than ₹100. Blame it on inflation!!!
Inflation is measured as an annual percentage increase that is generally compared year on year, i.e. the inflation rate of a month against the same month in the previous year.
Source: Database on Indian Economy, RBI's Data Warehouse (online)
As the chart shows inflation in October this year was lower than the inflation in October last year (2016). In fact, inflation for every month this year has been lower than that of the corresponding month, last year. This means the prices of goods and services in October last year increased at a higher rate than the increase in October this year.
While its impact is felt as you go about with your purchases of goods and use of services, the relevance of inflation in financial planning is often missed.
How often have you compared the value of returns from an investment against inflation?
Imagine this – you earn Rs. 100 out of an investment last year and this year too. You celebrate with a Rs.20 cup of coffee. Thirty years later, the Rs.100 return won’t be able to buy you the celebratory cup of coffee because it now costs more than Rs.200 (assuming an average 7% annual rate of inflation).
Extend the inflation factor to your monthly living expenditure
Inflation will increase your current living costs to a much higher level at the time of retirement. Accordingly, your retirement corpus needs to last you throughout your 2 – 3 decade-long retirement life, at prevailing higher prices.
The lack of factoring this ‘time value of money’, i.e. the reduced value of money in due course of time, will present itself in a financial struggle during your retirement years. You may either struggle to make ends meet or cut corners, or rely on family support as your retirement fund was inadequate and ultimately ran dry during your golden years.
Hence, factoring inflation in retirement planning is essential. Here are some tips that you could use when planning your retirement.
Age and costs increase as years go by - Not just commodity prices but a rise in healthcare and medical costs need to be factored into your retirement planning too. In your retirement years, you are likely to need and seek more medical care and attention than during the time you were earning.
So, multiply your present annual medical costs, not just by inflation, but by an age-based use factor as well. Remember that inflation can affect different commodities differently; food and fuel prices are likely to fluctuate daily, albeit at different volatility. Cost of necessities such as utilities (gas, power, and water) rise steadily also, increasing the cost of living.
Source: Historic Fuel Price Difference - Prices of Petrol and Diesel in India (Capital - Delhi) in last 10 Years, mycarhelpline.com; Cost of Living, Numbeo
Corpus growth trumps inflation - Choose a retirement plan that copes with rising inflation. When choosing your retirement plan, make sure it has an ‘increasing sum assured’ option. This type of protection plan will provide life cover that will increase every year in order to mitigate the impact of inflation.
Consult a financial professional for guidance to help you design an investment portfolio that yields returns to surpass inflation rates. Use a Future Expense Calculator to understand how you can beat inflation and calculate the amount you need to save today to meet your expenditure tomorrow. Speak to retirement fund houses to get a quote and compare to choose the best-suited retirement plan that generates inflation-proof earnings. This is because inflation will diminish the purchasing value of your savings and therein your retirement corpus with the passage of time.
Freeze your retirement time - Improved healthcare facilities have driven an increase of more than 10 years of our life expectancy in the past 20 years. Between 2010 and 2014, the total life expectancy was at 67.9 years. Men were at 66.4 and women at 69.6[i].
So, you need to save enough to sustain your lifestyle for at least 2 decades of retirement life since inflation would still be prevalent. Therefore, you must decide on when you intend to retire, how much you need to save for retirement, and accordingly choose a plan. There are different types of retirement calculators that can help you find out how much you need to save for insurance, how your lifestyle choices affect your lifespan and the amount you need to save to protect your family.
Ultimately an ideal retirement plan is one that provides a high degree of diversification, is judiciously spread across debt and equity, balances out risks involved and factors in inflation. When planning for retirement, consider inflation or it could make or break your aspirations of a comfortable retired life. Make a smart choice.