Retirement Planning: If you ignore this one thing, even by mistake, then the whole calculation will go wrong! Even a fund of crores will fall short

For a happy retirement life, just saving money is not enough, but it is also very important to understand the effect of inflation and include it in your planning. Inflation is a 'silent killer' which reduces the value of your money over time. If you ignore it, then even your retirement fund of crores can end prematurely.

We all work very hard in our youth, so we want our old age to be spent peacefully at least. At that time, there should be enough money so that the rest of the life can be spent comfortably. For this, we all start planning a lot from the days of youth itself. We try to collect as much retirement fund as possible by investing in various schemes. But the big question is that the amount of retirement fund you are thinking of collecting, will it be enough at that stage of your age? This question is because there is one thing that if you ignore it even by mistake, then the whole calculation of your retirement can go wrong and even a fund of crores may fall short.

The thing we are talking about is inflation, which is increasing every day at the same speed and is also increasing the charges for you at the same speed. Many times we make goals for retirement fund, but ignore inflation and this mistake is very heavy on old age. Know about this here.

Inflation is a silent killer

Often people make today's expenses as the basis while setting the target of retirement. They think that if today their house is running in Rs 50,000 per month, then the same amount of money will be enough even after retirement. This is the biggest and most dangerous mistake of retirement planning which can spoil the whole calculation of your retirement.

What is inflation and how does it eat up your money?

In simple terms, inflation means the increase in the prices of goods and services over time. That is, the goods you can buy for Rs 100 today, you will have to pay more for the same goods next year. This simply means that the purchasing power of your money decreases over time.

Imagine, the milk packet which costs Rs 30 today, might have been Rs 15 10 years ago. The movie ticket which costs Rs 300 today, was Rs 150 a few years ago. This is inflation, which slowly eats away the value of your money like termites.

The biggest mistake in calculation: Understand with an example

Let us understand with an example how costly it can be to ignore inflation.

Suppose, Ramesh is 30 years old and his current monthly household expenditure is Rs 50,000. Ramesh wants to retire at the age of 60. That means he still has 30 years left for retirement.

Case 1: When Ramesh ignored inflation

Ramesh thought that even after retirement he would need Rs 50,000 every month. He started creating his retirement fund accordingly.

Case 2: When inflation was taken into account

Now let's see what the reality is. If we assume an average inflation rate of 6% in India, then what will be the value of Rs 50,000 today after 30 years?

Calculation: According to the formula of future value, after 30 years Ramesh will need about Rs 2,87,000 every month to maintain a lifestyle equivalent to Rs 50,000 today.

(FV = PV x (1+r)^n | FV = 50,000 x (1+0.06)^30)

Where is 50,000 and where is 2.87 lakh rupees! You must be shocked to see the difference. If Ramesh plans for Rs 50,000, his retirement fund will be exhausted many years before he expects it and he will have to face financial crises in his old age. Even a fund of Rs 1 or 2 crore may fall short of this requirement.

So what to do? How to make an 'inflation-proof' retirement plan?

Identify your real retirement target

The first step is to correctly assess the amount needed for your retirement. Like the example given above, take your current monthly expenses as a basis and calculate with an average inflation rate of 6% how much money you will need every month at the time of retirement. You can use an inflation calculator for this.

Don't just save, invest

Just keeping money in a savings account or at home will not make it grow, rather inflation will reduce its value. You have to invest in a place where you get a return higher than the inflation rate.

Choose the right investment options

Equity (stock market) is considered one of the best options to beat inflation in the long term.

Equity Mutual Fund (SIP)

This is the best way for the common investor. Through Systematic Investment Plan (SIP), you can create a large fund in the long term by investing a small amount every month. Diversified mutual funds have given an average return of 12-15% in the long term, which can easily beat inflation of 6%.

National Pension System (NPS)

This is a great tool designed especially for retirement. In this, you get the option of both equity and debt and also helps in saving tax.

Public Provident Fund (PPF)

It is a safe option that provides stability to your portfolio. However, you cannot beat inflation by relying on PPF alone, so it is important to balance it with equities.

Regular portfolio review and rebalancing

Retirement planning is not something that can be done once and forgotten. Review your portfolio every year. See how your investments are performing. Increase your investment (SIP) amount as your income increases.

Frequently Asked Questions (FAQs)

1. What inflation rate should I assume for retirement planning?

Financial advisors usually recommend assuming an average inflation rate of 5% to 6% for long-term planning.

2. Is Rs 1 crore enough for retirement?

This completely depends on your age, lifestyle and inflation. As shown in the example, if you are young, the value of Rs 1 crore after 30 years will be much less. You should set your target according to your expenses and inflation.

3. What if I have already started planning without considering inflation?

No problem. You can correct your mistake even today. Recalculate your retirement goal according to inflation and increase your monthly investment (SIP) amount so that you can reach that goal.

4. When should I review my retirement portfolio?

You should review your portfolio at least once a year and rebalance it if needed.