Inflation is an important determinant of savings, and thus when planning for retirement, one needs to have a mechanism to determine how this aspect will impact the value of the money in the future. One thing that is not easily understood is that the corpus that you plan to accumulate for retirement will always be worth the same. But, it reduces the value of money in the economy very quickly hence a worthy course to take when managing your money.
Inflation seems to play a significant role in retirement savings hence the need to fully understand how it affects the endowment.
If you intend to retire with a corpus of Rs 5 crore you must understand that the value of Rs 5 crore will further reduce year after year because of inflation. Rising inflation results in an increase in the price of goods and services, and therefore today’s money may not effectively be used to purchase items as it may be valued at a higher price in the future say Rs 106 or more. Ideally, your savings should beat inflation so your investments must make a return that is higher than the inflation rate.
Plans to save for retirement: depending on how many years you have before retiring
Your retirement investment also depends on the number of years you take to save for retirement. For instance, assuming that you start working at the age of 25 with planning to retire at the age of 50 then you are provided with 25 years to save Rs 5 crore. If, for example, you hope to retire at 60, then you have 35 years ahead of you. In the first scenario, you will require investing more since you have a shorter period in which your investments will accumulate.
Impact of Inflation: Case Study
To illustrate how inflation affects retirement savings, let’s analyze two scenarios with an assumed inflation rate of 6% per year: To illustrate how inflation affects retirement savings, let’s analyze two scenarios with an assumed inflation rate of 6% per year:
Still, under this scenario, it is assumed that the employee is going to retire after working with the company for 25 years.
If you have Rs 5 crore and let it be idle for 25 years with an inflation rate of 6% then the real value of Rs 5 crore will be equivalent to nearly Rs 1. 17 crore today. Such a decline proves the common statement that inflation reduces the actual value of money in a quarter of a century.
Scenario 2: Retirement After 35 Years As mentioned earlier, another approach that may be utilized in the overhauling of this organization is the introduction of early retirement after 35 years of service.
Keeping Rs 5 crore intact for 35 years with an inflationary rate of 6% per annum will be reduced to approximately Rs 51. 62 lakh today. This goes further to illustrate the highly devastating effects of drifting in inflation over some time.
Conclusion
In conclusion, let us say that inflation has the potential of diminishing significantly the real value of savings in the process. If you retire in 25 years or 35 years, then, the money you expect to spend in the future must be able to be able to finance your needs in the future because of inflation. Advanced preparation for the future will mean investing in assets that will be able to easily beat inflation, thus helping the retirement corpus retain its buying power.
To get more information and tips on retirement savings and planning we invite you to visit our website Aditya Singh Tharran.
