Why should you Consider Inflation when Planning Retirement?

2021-05-27

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Inflation, in India, is measured using two standard indicators known as the Wholesale Price Index (WPI) and Consumer Price Index (CPI).

You buy a 500G packet of filter coffee powder for Rs. 400. In another 10 years, the same packet of coffee powder may cost Rs. 700. This implies the cost has grown at almost 6%. In simple terms, this % in growth of the cost of products is called Inflation. The same Rs. 400 that can fetch you a 500G packet of coffee today will be sufficient to buy only 285G of coffee after 10 years.

In a nutshell, the buying power of your money goes down with time. To ensure your hard-earned money does not erode in value over time, the money must grow faster than the rate of inflation. The question is how inflation impacts your retirement plan. Let us delve deeper to understand.

How your Retirement Plan is Impacted by Inflation?

Considering the overall inflation rate to plan for retirement could be detrimental. You must consider what will remain relevant to you over the years. If healthcare costs increase by 10% year on year, this can impact you in your old age.

The health insurance, if any, may not be sufficient on one hand and your savings may run dry sooner than you expected. Healthcare costs are also steadily increasing and are now above the average rate of inflation. Healthcare accounts for a major portion of senior citizens’ living expenses.

Also, you must be cognizant of these factors when you invest in funds and plan for your retirement kitty. If you invest in funds that give you an average of 7% returns when the cost of food is growing at 9%, it is evident that your savings will not help you lead the lifestyle that you are leading now.

Some insights into how inflation can impact your retirement plans given below so that you can start planning early:

1. Lowers Returns on Investments:

Your investments in Provident Fund (PF) and Public Provident Fund (PPF) may give you assured returns of 8.5% and 7.1% respectively. But the real growth is calculated by factoring in the rate of inflation.

If the current rate of inflation is 6%:

Real Return from PF holding =8.5%-6%=2.5%*
Real Return from PPF holding=7.1%-6%=1.1%*
* Approximately

Learn how saving at an early age will help you during retirement.

2. Lower Purchasing Power:

The above example is simple and considers only the average rate of inflation. But as mentioned earlier, if food inflation is specifically considered, the real return could be lower or even negative

If the current rate of food inflation is10%

Real Return from PF holding =8.5%-10%= (-)1.5%
Real Return from PPF holding=7.1%-10%= (-)2.9%

A negative return implies that your money is getting eroded over time and cannot buy even those things you can afford today.

3. Difficult to Estimate Future Costs:

The rate of inflation is an aggregate of rates across different sectors, products, and locations. The aggregate number is an average and may not be relevant unless you look at specific items or sectors that impact you.

Inflation is dependent on several factors that including resource availability, geopolitical influences, market volatility, political stability, and general well-being in the region. Past rates are not an indicator of the future and even if so, the rates have widely fluctuated (Source: Statista) between a high of 13.48% in 1991 and a low of 3.83% in the year 2000.

Also Know - What is Inflation?

Invest in Saving and Investment Plans to Beat Inflation

Keeping these factors in view, it would be wiser to invest in asset classes that will help you generate wealth, assure your family of reliable financial support, in case of exigencies, and allow you to lead a stress-free retired life. Investment-linked insurance plans have proven to be comprehensive in providing an all-round financial backup because of their innate flexible design.

3 Saving and Investment Plans by Canara HSBC Life Insurance

Canara HSBC Life Insurance offers various saving and investment plans that you use to build your retirement corpus. The best thing about these saving plans is they take inflation under consideration. Most of the plans are flexible and they allow you to increase the sum assured keeping in account the growing needs of an individual.

1. Pension4Life

Pension4Life plan is a safe long-term investment plan that gives you two options:

2. Immediate Annuity: The pension starts as soon as you invest a lump sum amount

3. Deferred Annuity: Invest gradually and start a regular stream of income a few years later

If you have recently retired and would like to invest a lumpsum amount to earn a regular income, the immediate annuity will meet your requirement. If you have a long way to go before you retire, a deferred annuity gives you time to invest over the years and build a corpus.

You will get income streams called “annuities” till the end of your life after which the purchased/invested amount would be given to your nominee. In case you have opted for a Joint Life Annuity, your spouse would continue receiving annuity even after you, until his/her demise. The purchased/invested amount would then be handed over to the nominee.

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.

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