Retirement savings are one thing, and achieving financial goals is another. One may continue to save yet be far from reaching the objectives because long-term inflation may unfavourably tilt the purchasing power of your savings and make the portfolio inadequate. Those who can evaluate the inflation rate, at least closer and not way off the mark and fill the gaps, will have relatively less trouble navigating the needs post-retirement than someone who gets it completely wrong. This shows that your corpus must have an adequate buffer for inflation.

So, you should factor in the possible long-term inflation range in your retirement savings plan to ensure your corpus fund can withstand any future price fluctuations. You can use a retirement calculator to determine the required corpus, considering inflation-adjusted expenses, returns, and the number of years in retirement. 

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Amol Joshi, founder of Plan Rupee, a financial planning and investment firm, explains two scenarios: inflation at 5 and 7 per cent and annual expenses at Rs 7 lakh. Says Joshi, “To arrive at an approximate corpus with an inflation of 5 per cent, and the annual expenses at Rs 7 lakh, one needs to know the longevity or how long the corpus needs to sustain. Assuming longevity of 25 years into retirement, one needs approximately Rs 1-1.2 crore, assuming the portfolio returns are between 9 and 11 per cent and corpus exhausts at the end of 25 years.” 

If the inflation is at 7 per cent, Joshi explains: “You need a corpus of approximately Rs 1.10-1.30 crore. This difference can negatively impact your retirement lifestyle. So, inflation is required to be monitored and factored in on assessment during any major events of life.”

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Inflation Threat To Retirement Savings

Purchasing Power: Inflation reduces the value of money over time. It implies that you must pay more than the price you pay for the same stuff today. If a retiree’s income does not increase in line with inflation, this may result in a lower standard of living. 

Effect On Savings: Inflation will decrease the value of your savings, which means your retirement fund will have less buying power when you retire if inflation goes up. If inflation spikes significantly, retirees’ cost of living will increase. The cost of goods and services will increase, adversely impacting their retirement corpus. 

Reduced Value of Assets: Many retirees depend on fixed-income sources like bonds, pensions, and annuities. These incomes may lose value due to inflation, which will make paying their bills more challenging. 

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How To Reduce Inflation’s Impact On Savings

Joshi stresses that people should aim for a bigger corpus, and if inflation shoots up, they should avoid any lifestyle enhancements during retirement. “Make sure you do not run out of funds by making a proper plan with realistic numbers and updating it annually or at a major life event. Many investors target a lumpsum amount like Rs 50 lakh or Rs 1 crore. While this is a good start, you will never know if this is adequate till you calculate your future expenses based on certain inflation and portfolio returns assumptions,” he adds.