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Why should you Consider Inflation when Planning Retirement?

dateKnowledge Centre Team dateMay 27, 2021 views212 Views
Retirement Planning & Inflation | Best Retirement and Pension Plan

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 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 include 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.

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.

4 Saving and Investment Plans by Canara HSBC Oriental Bank of Commerce Life Insurance

Canara HSBC Oriental Bank of Commerce 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. Invest 4G

Invest 4G Plan is one of the most flexible and efficient investment options to aggressively grow your investment. In this plan, you can invest in a mix of equity and debt instruments so that you can take advantage of market movements and benefit from equity growth.

This plan helps you benefit from market growth even when you are not following the markets continuously:

  • The auto funds rebalancing feature moves your money across funds, each quarter, as per your defined allocation
  • Meet unexpected expenses by using the partial, systematic, or milestone-based withdrawal feature
  • Wealth boosters and bonuses for better portfolio growth in the long-run
  • Protect your goal with premium protection option where the insurer pays remaining premiums, in case of your early demise
2. Pension4Life

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

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

2. 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.

3. Guaranteed Income4Life

Another unique plan called the Guaranteed Income4Life allows you to invest for a specific period (say 10 years) and defer the pay outs by another 5 years. Your pay outs will start thereafter. The prominent unique features of this plan are:

  • You can hold the plan jointly with your spouse
  • The income can continue until the younger spouse reaches the age of 99
  • The income is guaranteed, so it will continue regardless of the market performance
4. Guaranteed Savings Plan

Guaranteed Savings Plan offers a guaranteed Sum Assured along with guaranteed yearly/loyalty additions. If you opt for a 20-year policy term with a 10-year premium paying term and invest Rs.1lakh each year for 10 years, the policy can give you a lump sum return of approximately Rs. 23lakhs at the end of 20 years. In case of untimely demise, the family gets higher of the following as a lumpsum amount.

a. 11 times the annual premium

b. 105% of premiums paid until the death

b. 105% of premiums paid until the death

Retirement planning is not about just keeping aside some money for old age. It should be a well thought out process taking into account possible expenses, risks, and suitable investment options that will give you enough money to live comfortably and peacefully. After you retire, only concern for your invested money is to keep up with the inflation. Meaning, wealth preservation is more important a goal for you than wealth generation. Thus, you can choose investments which can keep growing your retirement money steadily.

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