The Buyt Desk
As you closely observe the retirees in your surroundings, you will notice two distinct groups. One group retired from a government job enjoying a comfortable retirement supported by a decent pension. Another group of retirees struggle to make ends meet and find it difficult to cope with the rising cost of living. They are private job retirees having no pension or second income source.
But, shortly, the disparity between these two groups will no longer exist as the government has ended the pension scheme in most jobs. As a result, those who are proactive and plan retirement corpus smartly will likely to have a more comfortable and fulfilling post-retirement life.
Thus, one must plan for retirement at an early age. And while planning the retirement corpus, keep the inflation in the centre. It is because inflation will increase the price of everything around. Today, things that cost Rs 100 would cost Rs 200 or even more after ten or twenty years.
If you don’t believe this, remember that cup of tea you would enjoy with your friends in the canteen during college. At that time, the cost of that cup was Rs 2, and now, the same cup might cost you Rs 10 or even more. The price rise is the result of inflation.
After ten more years, the price of the same cup of tea will be even higher because of inflation.
So, you must understand that inflation has a compounding effect on prices. It means the prices of things will continue to rise year after year, and if you plan your retirement corpus according to the current inflation rate, you may fall short of the funds required to sustain you during the post-retirement period.
E.g., Suppose today you need Rs 1 cr for retirement. After 20 years, with 6 % inflation, your requirements will be Rs 3.20 cr to meet the same requisites.
What is the Best Method to Grow Your Retirement Corpus in Pace with Inflation?
Building a corpus for retirement in pace with inflation doesn’t mean you should work harder and save more. Instead, let your investment do this job for you. It is the easiest and smartest way.
To ensure your investment grows in pace with inflation, it must earn at least 1% or 2% interest above the projected inflation.
The average inflation in India is 6%. Hence, your target should be to earn a minimum of 7% to 8% return on investment post-tax deduction.
You can target 1-2 % above the inflation, but try to attain a 7-8 % average. If you fail to do so, inflation will harm your retirement corpus.
Which Investment Products Give Higher Returns?
Traditional investment products such as FD, PPF, and NPS generally yield a return that ranges between 5-6 per cent. On the other hand, investment products like mutual funds, equity, and real estate deliver more return, up to 11-12% in the long run.
Although, the investment is subject to individual risk-taking ability. The investment that gives higher returns comes with high risk too.
Conclusion: Planning for retirement corpus is the need of time today. To ensure your retirement corpus outpaces inflation, include traditional and non-traditional both investment products in your portfolio. Traditional Investment products like FD, Bonds, and PPF offer relatively stable returns but may not keep up with inflation. On the other hand, non-traditional investment products such as the stock market and mutual funds have given higher returns and outpaced inflation.
