Retirement investment planning is critical but often ignored and postponed for a later stage. Most of us tend to believe that our present day earnings and savings will cushion our expenses during retirement years. Rarely do we consider the erosive impact of inflation on our savings.

To understand this better, let’s look at an example;

  • Your current age: 30 years
  • Years to retirement: 30 years
  • Your current living expenses: INR 30,000 p.m. or INR 3,60,000 p.a.
  • Expenses at 60 years will be (assuming 7% inflation): INR 2,28,000 p.m. or INR 27,36,000 annual
  • Years after retirement = 20 years
  • Savings required = (20X 27,36,000) = INR 5.4 cr

So, you would need a retirement fund of INR 5.4 cr to sustain your current lifestyle and expenses in post-retirement years. Do you think that you can build this corpus in next 30 years? Sounds impossible! But this can be achieved by sound selection of investment instruments.

Inflation reduces the purchasing power of money. Hence, it is very critical to understand the impact of inflation on your short-term or long-term financial goals. Some crucial factors that necessitate financial planning for retirement are as follows:

Inflation can curtail your ability to pay for children’s higher education expenses at a later time

When you are closer to your retirement years, your children’s higher education expenses will come up. This will include coaching fees, college fees, and other overheads. While it may cost INR 3 lakh for coaching of two children today, this will reach INR 11.5 lakhs in next 20 years, assuming an inflation of 7%. On top of this will be college fees for professional courses like MBA, Engineering etc. For instance, with inflation fees of IITs in 2036 will be INR 7,75,000 as compared INR 2,00,000 in 2016.

Inflation can cripple your plan of an elaborate wedding for your children 

Marriages are celebrated expenses in India. One can’t strike off this expenditure from his/her list. You will most likely make this spending 25 years henceforth. The future value will also increase in the same fashion. So if the wedding cost is INR 25 lakhs today, it will be INR 1.3 cr in 2041.

Inflation may force you to call off that dream family vacation, or may be purchase of a luxury car

You waited all these years to plan a family vacation post retirement, or buy a luxury car for yourself. But after retirement, you realize that the amount you need to spend on the family vacation or the luxury car has outgrown your savings. The only reason such a lapse – you forgot to factor inflation in your savings plan.

Inflation can increase your health expenses manifold

As you grow old your medical expenses will also increase. For a medical surgery costing Rs 5.0 lakh currently, you may have to spend anywhere between INR 38.0 lakh during your post-retirement phase at a rate of inflation of 7%.

It is therefore, pertinent to start your retirement planning now. Else all your personal goals and aspirations can go for a toss at a later point. Surely, you don’t want to get there. So, what is the ideal route to retirement planning?

We have put together a quick guide for you:

1. List down your regular expenses. This could include your house rent, electricity, gas, phone, salary to maid transport, leisure expenses, daily consumables, kids expense, etc.

2. List down your future expenses. This would include expenses for higher education, wedding, vacation plans, purchase of a car or any other luxury item

3. Calculate the future value of regular expenses 30 years from now (if you are aged 30 years currently), and forward value of future expenses as per the milestones attached to them. For instance, you may want to go on a vacation in 5 years from now, buy a luxury car in 10 years, marry your children in 20 years, etc. The future value for all these expenses will depend on – rate of inflation and the number of years.

4. Focus on real rate of return. Once you have calculated the future value of all expenditure streams, work-out the monthly investment you need to make to build he corpus. Evaluate the investment options available to you. Key point to note here is the rate of return. While some investment instruments will guarantee 12-15% rate of return, but you need to calculate the real rate of return, which is rate of return adjusted for inflation. The financial instruments you choose should give you returns above the rate of inflation. For instance, if the inflation rate is 8%, your investment should yield at least 12% to beat the impact of inflation

5. Spread your investment across different instruments to minimize risk, and exemplify returns. Ideally one must invest in instruments which give higher post-tax returns as compared to the rate of inflation. Some options are listed below;

Investment option(s) Brief description
National Pension System (NPS) A voluntary retirement savings scheme that is administered on behalf of the government by the Pension Fund Regulatory and Development Authority India (PFRDA)
Employee’s Provident Fund (EPF) A retirement benefit scheme available to all salaried employees. This fund is maintained and overseen by the Employees Provident Fund Organisation of India (EPFO)
Public Provident Fund (PPF) A popular government backed scheme with a fixed rate of return
Equities Can be a good investment tool provided you start early. Risky but has potential to give best returns in long run
Tax Free Bonds Long term fixed income investments issued either by government approved institutions or government
Mutual funds A smart and convenient way is to invest in a systematic investment plan (SIP) in mutual funds such as balanced funds, equity-oriented hybrid funds, etc.
Pension Unit Linked Insurance Plans (ULIPS) Various Life Insurance Companies in India offer market-linked Pension ULIPs.  Suitable for risk-taking investors
Money Back Policy Ideal for people who want a guaranteed return on their investments and are looking for regular payouts as well as an insurance cover
Real estate or property Investing in ever-appreciating asset like property is a good option.

Investment planning for your retirement is essential and should be prioritized to live a financially stable self-dependent stress free retired life. Start this now without any further delay!!

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