Understand the impact of inflation on your retirement corpus
Retirement can be the most crucial phases of your life. Since you might aim for a comfortable retirement period, you might save your hard-earning savings diligently. Apart from saving regularly, you might also be in the habit of investing rigorously for building a substantial corpus for your retirement. After maintaining a balance between savings and investments, you might fall short of funds to live a stress-free retirement period.
While saving for retirement, considering the impacts of inflation can play a significant role. If you do not take the inflation rate into consideration, you might run low on money after retirement. Due to the lack of resources, you might fail to fulfil your routine expenses such as groceries, utility bills, rental payments, etc. as well as meet your post-retirement goals such as traveling, pursuing an interesting hobby, starting a new venture, and so forth.
Before you start your retirement planning, let’s understand the impacts of inflation with the help of an illustration:
Rahul is a 60-year-old individual who wishes to retire. Over the years, he has built a decent corpus with the help of the right investment tools such as Public Provident Fund (PPF), Employee Provident Fund (EPF), and other equity-linked instruments. While calculating his accumulated retirement corpus, Rahul realizes that the corpus can only last up to 10 years based on his post-retirement expenses.
Although Rahul has saved and invested rigorously during his active working years, he is unable to identify how his retirement savings have fallen short. So what do you think went wrong in his retirement planning process?
Rahul started saving 25 years ago. During that period, his monthly expense was Rs. 25,000. However, he had assumed that after 20-25 years, his expenses would eventually increase. Today, his current monthly expenses range between Rs. 70,000-80,000. Although he started saving and investing at a young age to build a substantial retirement corpus, he failed to consider the future inflation rate, which can be 7%-8% in the future.
If Rahul saves Rs. 25,000 every month at 35 years, an inflation rate of 5% every year can allow him to boost his retirement savings to Rs. 85,000 per month. However, this might not be possible for other mandatory spendings such as medical expenses or leisure expenses. As an aspiring retiree, he should initially assume a 5% increase in the inflation rate. A 1% increase in inflation can lead to the rise in the expenses of Rs. 1.08 Lakh every month.
The compounding effect played a significant role throughout the 25 years in Rahul’s life. Since retirement planning is a long-term process, Rahul should not only consider the future inflation rate as well as look for investment vehicles such as the Unit Linked Insurance Plan (ULIP) that can provide high returns. A ULIP plan can be a dual-benefit product, which can allow you to receive the benefits of investment and insurance under a single roof.
A ULIP policy has a lock-in period of 5 years. Due to the longer lock-in period, you can build a relatively high corpus for a secure retirement period in the future. However, you should invest in a ULIP policy at a young since the benefits of the power of compounding can come into the picture. When you have an ample amount of time in your hands, you can accumulate more wealth to meet your routine expenses as well as accomplish your post-retirement life goals with ease. Moreover, a ULIP investment can garner high returns if you stay invested for a long time.
In a nutshell, inflation can have a reverse impact on your invested capital. Rather than multiplying your accumulated wealth, inflation can consume your hard-earned savings leaving you with nothing in your hands. Therefore, take the inflation rate into account compulsorily before planning your retirement.