I remember a time when I used to go out and buy a pack of bread for Rs. 2. Now the same bread costs Rs. 10-12. There was a time when I would go to the milk shop and bring 2 litres of milk for Rs. 10. Now I bring 500 ml for Rs. 21. Few years ago, we bought our first washing machine for Rs. 5,500. The same washing machine now costs around Rs. 10,000.
We have all witnessed the rise in prices, gradual in the late 90s and early 2000s, astronomical over the last 10 years. Yet, we fail to foresee the same happening in the future. If the prices of milk and bread can rise by a factor of 5-6 times within 15 years, imagine where they might be when you retire 25-30 years from now.
Yet, when we plan for our future, we fail to take this into account. We completely fail to foresee the effect inflation will have on our finances. Sadly, this mistake throws most people’s retirement plans haywire.
People in their late 20s and early 30s, think it is too early to start planning for retirement. They think that if they are spending Rs. 30,000 per month today, they might need Rs. 60,000-70,000 per month after retirement. The reality, unfortunately, is vastly different.
For a person of 30, even at a very moderate inflation of 4 per cent per year, post-retirement monthly expenses on maintaining the same lifestyle will amount to Rs. 97,300 per month. This, assuming that his lifestyle doesn’t change at that time. And for a country like India, which is set to grow at a fast pace, assuming inflation to be around 4 per cent will be a mistake. A modest increase of 1 per cent in the inflation rate considered above, i.e., a rate of inflation of 5 per cent per year, will lead to his expenses rising to Rs. 1,29,660.
So, always remember to account for inflation while planning for your retirement. Retirement, as a goal, requires planning for the long term. Just as the effect of compounding leads to greater returns over time, the same way the effect of compounding will lead to prices increasing manifold till your retirement. Not taking this into consideration will leave you high and dry within a few years of your retirement.
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