We all work and earn to enjoy the good things in life.
A trip abroad, a new car, a well furnished house with modern amenities – we work more harder each day and save more to fulfil these aspirations of life. But if savings donโt grow at a rate higher than the rate at which expenses are, we might end up being poorer than we were in spite of the savings.
Every body needs fund for post retirement life. It is the fund that will let us live happily and independently with pride and dignity. Generating this fund is not as easy as it seems and requires an assessment of the future. There has to be regular updating on the retirement funding plan. The foremost assumption in retirement planning is the rate of inflation. But with a growing economy like India it is hard to predict it and therefore retirement funding needs to be analysed regularly for any change in facts and thereby its bearing on the assumptions.
We will try to expose the impact of inflation on the retirement funds with a simple calculation. We assume that in 20 years Mr. X is going to retire. On a current value he feels Rs.15000/- is enough for monthly expenses in the future. If some feel Rs.15000/- is more, be cautious to the rising medical expenses, which will be growing exponentially. Now just see the difference in the future value of Rs.15000 in the 20 years at different levels of inflation.
To live on monthly income of current value Rs.15000/- Mr. X would after 20 years needs Rs.33000/- monthly if inflation in that time frame is 4% and Rs.48000/- per month if inflation is at 6%.
So you can imagine with a nominal change in inflation the variation on the future value of Rs.15000/- is so drastic. In such scenario planning is difficult and needs a very scientific approach. Let us go further and now see the impact of this on his retirement fund. With a life expectancy of 80 years Mr.X has to live on his investments for 20 years. At a balanced rate of return of 11% per annum here is an estimate of the funds he needs to generate to take care of himself; at different future values of Rs.15000/- per month.
A small factor like inflation has considerable affect on the monthly income required to maintain current standard of living. And the final impact on retirement corpus is big enough to give sleepless night to Mr. X for the rest of his living life.
Retirement funding is the biggest fund requirement of life and also the most difficult to asses and predict.Therefore it is advisable to take a professionalโs advice and monitor regularly for changes that might impact it.
