How does this affect your retirement?
Let's look at some numbers to help bring out the effect.
|Current Age||Retirement Age||Current Mthly Exp||Assumed Inflation Rate (pre and post retirement)||Expected Return Post Retirement||Life Expectancy||Retirement Corpus required (approx)|
|30||60||Rs. 50,000||8% p.a.||8% p.a.||85 years||Rs. 15.09 cr|
|35||60||Rs. 50,000||8% p.a.||8% p.a.||85 years||Rs. 10.27 cr|
|40||60||Rs. 50,000||8% p.a.||8% p.a.||85 years||Rs. 6.99 cr|
|45||60||Rs. 50,000||8% p.a.||8% p.a.||85 years||Rs. 4.76 cr|
If you look at the table above, you'll notice a few things:
Firstly, all assumptions have been kept constant, the only change is the current age. So basically this situation applies to somebody who wants to retire at 60, currently spends Rs. 50,000 per month, has a life expectancy of 85 years, will put his investments into safe fixed income instruments earning 8% per annum post retirement (post tax). This person might be 30, 35, 40 or 45 years old.
Secondly, you'll notice that the inflation rate post retirement is 8%, and so is the investment return rate post retirement. This means that any investments made will generate the same rate of return as the rate of wealth erosion due to inflation. So the real value of your investments will remain the same.
Thirdly, you'll notice that for a 30 year old spending Rs. 50,000 a month, who wants to retire at 60, the retirement corpus required is Rs. 15.09 crores approximately.
With all the same assumptions, a 45 year old has to accumulate Rs. only 4.76 crores by the age of 60 a comparatively much smaller corpus.
Why is this? The answer is simple.
A 30 year old has 30 years to go before he retires. His pre retirement expenses inflate continuously for 30 years. By the time he retires, his Rs. 50,000 monthly expenses will cost him more than Rs. 5 lakhs per month. That's a 10 fold increase, just to maintain his standard of living.
The 45 year old does not face this level of inflation. To maintain his standard of living at the age of 60, he has to shell out Rs. 1.58 lakhs per month only a 3 fold increase.
And that's what inflation can do to your retirement. The good news is that with the right kind of disciplined financial planning, both goals are achievable. But as with all successfully achieved tasks, the first step is often the hardest.
Use our Retirement Calculator to see what Your retirement number is and then call an unbiased expert financial planner to help you achieve this goal and all your other life goals.
PersonalFN is a Mumbai based Financial Planning and Mutual Fund Research Firm.