How to Handle the Effects of Inflation During Pre-Retirement and Post Retirement?

We often hear from our parents and grandparents that they used to buy movie tickets for Rs. 5. Milk that we used to buy for Rs. 13 a few years back has doubled now. Have you ever thought about why such a change in price happens?

The answer is inflation.

Table of Content

• You can’t avoid inflation
• How you can handle inflation?
• Handling Inflation During pre-retirement
• Pre-retirement investments and inflation
• Inflation during Post-retirement
• An important Mantra

You Can’t Avoid Inflation:

For the price increases to qualify as inflation, the rise in price has to be a sustained one. With time, for every rupee you own, you’d be able to buy a smaller percentage of goods or services

When inflation begins to march north, there tends to be a decline in the purchasing power of money. Let us consider that inflation stands at 5% annually. Theoretically, a bottle of water costing Rs.20 today, would cost Rs. 21 in a year. Not just that, when you reach your retirement, you may have the desire to travel the world and follow your other passions which may require a lump sum. The sum you saved may not be sufficient as Inflation would limit your purchasing power and hence your lifestyle. Hence never ignore inflation.

It is possible to control inflation and it is not possible to stop or avoid inflation.

How Can You Handle Inflation?

Inflation affects each person differently. As we progress in profitable positions in work, typically the amount we spend also begins to soar. While certain lifestyle changes with time are unavoidable, remember that every spending decision taken today can affect your finances for tomorrow. Read on to understand how we can combat the detrimental effects of inflation.

Handling Inflation During Pre-Retirement:

Inflation can be best handled with the right investments.

• Avoid excess spending and invest a percentage from your increased salary. Evaluate your budget and earmark specific areas of expense. Try to forecast your expenditure and work towards minimum deviation from your planned income to expense ratio.
• Design a lifestyle that suits your requirement. Decide how much you want to spend on luxuries, As you inch closer to the retirement finish line, ensure that your luxury needs are at the minimum.
• Try and work towards annual growth in income generation. Explore new opportunities and ventures to augment your income.

Pre-Retirement Investments and Inflation:

Remember that it is not enough if your investment makes sense; it also needs to make cents!

• Don’t keep money stagnant in your safe. In fact, with time its value depreciates. What you can buy with Rs. 100 today will cost you Rs. 150 after 6 or 7 years.

• When you make an investment, ensure that the rate of return is higher than the inflation rate. The difference in inflation rate and investment return rate is your actual return on the sum invested.

• If you have PPF or National Saving Certificate as your source of income for retirement, you will have to consider the impact of inflation on your returns. Over time, the declining interest rates can reduce the maturity value. Even if the interest rates don’t change as in fixed deposits, the amount you receive may be lower when compared to inflation.
• Inflation trends have a profound effect on how each portfolio needs to be structured. Allocate your assets based on your risk-return expectations. Higher the risk, the higher the returns. Embrace equities for the long term.
• Proven Diversified Equity Funds: This investment option can churn good returns if you have a good appetite for risk, as the returns range an average of 12-15%, which can suffice to beat inflationary trends.
• Also, consider the healthcare and medical costs when considering inflation during retirement as you will be more likely to seek medical help during your retirement.

Focus on what return your investment will yield post-tax and invest wisely.

Inflation During Post-Retirement:

“Inflation is the crabgrass in your savings.” -Robert Orben.

Failing to anticipate the effects of inflation on retirement finances can be a costly mistake. While it is important to keep investing after retirement too, the tolerance to risk also needs to be phased down.

• Life expectancy has also increased by 10 years in the past 20 years. Hence Plan for a fund that will sustain you in your sunset years
• The inflation rate needs to be factored in while deciding on the corpus fund.
• You need regular income after retirement. This regular income needs to increase year after year to take care of the inflation.
• When choosing a retirement plan, choose a plan that has an Increasing Income option. This will help keep inflation in check. You can also consult a financial planner to design an investment portfolio that yields return higher than inflation rates.
• Creating a corpus that can provide regular income year after year.
• Creating another corpus can help in providing additional regular income that can take care of inflation.

What we need to understand is that the investment strategy after retirement is not to beat inflation with investments, but to meet the inflation with investments.

Inflation is what every economy suffers from. It creeps on us with time. If not planned, it can sting us very hard. But as economists say, inflation is nothing to dread. A healthy rate of inflation has a positive impact on increasing consumption and keeps the capital in the economy flowing.

To discover how much you need to save for your retirement, check this Retirement Corpus Reliability Calculator. This will help you find if the amount you saved for your retirement will be reliable or not.

Also as a bonus, we have a video on the Best Investment Plan for Retirees. Do watch the video to gain deeper insights.

An Important Mantra:

Invest your money and don’t lock it up only with safe investments. The money safe in your ‘safe’ will not yield returns that can save you from inflation. For becoming a well-disciplined investor and achieve your financial goals, you need to focus on creating a financial plan. To make this financial planning exercise to be very easy for you, we offer you a complimentary financial plan consultation.