Published Article Details

How inflation can eat into your retirement corpus

Posted by: Arti Bhargava on May 14, 2018, 06.30 AM IST

Satish is nearly 60 and looking forward to retirement. He is proud of the fact that he has built a sizeable corpus by investing diligently in deposits, PPF, EPF and some equity mutual funds. All his investments have been made after much deliberation and research. However, just when he thought he had accumulated enough, some calculations revealed that his corpus will only last 10 years if he were to maintain his current level of expenses in retirement.

A distraught Satish can’t understand why despite years of hard work and regular savings, he is staring at the prospect of old age poverty. Let us understand what went wrong.

When Satish started saving 25 years ago, his monthly expense was Rs 25,000. He had assumed his expenses would double 20-25 years down the line. Unfortunately, his current monthly expense is around Rs 70,000-80,000. While he did all the right things by starting to save early and regularly and kept his retirement corpus untouched, he did not factor in the 7-8% rate of inflation.

For a 35-year-old spending Rs 25,000 a month, even a moderate inflation of 5% per year would push up post-retirement monthly expenses to Rs 85,000 per month. This does not allow for other compulsory spends like medical expenses and discretionary spends such as vacations. Moreover, assuming 5% inflation is a conservative view. An increase of even 1% in the inflation rate considered would lead to expenses rising to Rs 1.08 lakh per month.

The compounding effect of inflation led to prices increasing manifold over the last 25 years. Since retirement planning is a long-term goal, Satish should have accounted for a moderate rate of inflation and invested in instruments that give higher returns.

(The content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)

This article appeared in Economic Times dated May 14, 2018, 06.30 AM IST

Online Courses

Financial Planning
Basic Level

People are discovering how financial planning can help their money grow and prepare for a more secure futur

Financial Planning
Advance Level

Learn how to measure investment performance through analysing Returns on Investment (ROI) through this onli

Financial Planning
Advance Level

Understand the nature of investment risk with our course on measuring investment risk and how to manage it.

Financial Planning
Advance Level

Learn to construct portfolios and the techniques used to allocate assets across classes and manage risk.

Financial Planning
Intermediate Level

Learn to invest based on investment goals and objectives through our Intermediate course on Mutual funds.