How inflation shrinks your retirement corpus & ways to tackle it?

To beat inflation one construct the portfolio in a manner which proper debt to equity mix to beat inflation

Inflation is a silent threat to retirement savings, eroding the purchasing power of hard-earned money over time. As India grapples with rising inflation rates, retirees face the daunting challenge of maintaining their standard of living without a steady income. 

 

The impact of inflation on retirement savings

 

Inflation diminishes the real value of money, leading to increased expenses and reduced purchasing power. A retirement corpus of Rs 1 crore today won't have the same purchasing power 20 years from now. At 6 per cent inflation, your Rs 1 crore will effectively be worth only about Rs 31 lakhs in two decades.

 

 

“As of January 2025, 4.2 per cent is the CPI rate and the long-term average inflation is around 5.9 per cent. For an HNI investor they have goals such as children marriage, real estate purchase, abroad trips and wedding plans for children. These will lead to higher inflation which may sometimes vary between 8-12 per cent,” said Shweta Rajani, Head- Mutual Funds, Anand Rathi Wealth Limited.

 

“We need to understand if one wants to make 4 per cent real return then for a retail investor, the investment basket should generate at least 10 per cent (i.e., 4 per cent+6 per cent) and for HNI investor, the investment basket should generate at least 14 per cent (i.e., 4 per cent+6-12 per cent),” Rajani said.

 

Rajani explains the impact of inflation on a portfolio?

 

Say, a person wants to retire today with Rs 2 Cr. It will not be the same amount after 30 years as inflation will have a greater role to play. The target amount changes to Rs 11 Cr post adjusted for inflation. 

Without Inflation Adjustment	With inflation adjustment
Targeted amount	Rs 2 Cr	Rs 11.5 Cr
Inflation rate	Nil	6 per cent
Rate of return	12 per cent	12 per cent
Number of years	30	30
SIP amount required	Rs 6,000 p.m.	Rs 33,000 p.m.

 

Points to keep in mind when doing retirement planning

 

Goal based investing - Create short term, medium term and long-term goals and plan investments accordingly. This can help you understand how much you need to factor in inflation which deciding your asset classes and setting return expectations. 

Tenure	Amount Required	Inflation adjusted amount required	Equity - 14 per cent	Debt- 7 per cent
Short Term	3 yrs	20 L	23L	30 per cent	70 per cent
Medium Term	5 yrs	50L	67L	70 per cent	30 per cent
Long Term	15yrs	1 Cr	2.39L	80 per cent	20 per cent

 

Regular portfolio rebalancing - Annual reviews and adjustments can help maintain an optimal inflation-resistant asset allocation.

 

Continued education - Stay informed about economic trends, investment opportunities, and emerging financial technologies.

 

Flexible withdrawal strategies - Implement dynamic withdrawal plans that can adapt to changing economic conditions.

 

Healthcare and long-term care planning - Consider investments and insurance products that can mitigate rising healthcare costs.

 

Utilise retirement calculators - Online tools can assist in estimating the required corpus by incorporating expected inflation rates alongside current expenses and anticipated returns on investments.