#Inflation and its impact on your Financial Planning - A thread
When doing Financial/Retirement Planning, almost all of us forget to account for the impact of inflation on our financial goals.
When doing Financial/Retirement Planning, almost all of us forget to account for the impact of inflation on our financial goals.
Inflation is nothing but a gradual decrease in the purchasing power of money over a period of time. To make it clear, if you can buy a product for ₹100 in 2021, with an annual inflation rate of 5%, you have to spend ₹105 in 2021 to buy that same product.
The actual value of ₹100 in 2022 will be only ₹95. That's inflation. How does it impact your savings and retirement plans?
All of us, calculate our current expenses and plan for the same amount during our retirement days as well. This would be a big mistake.
All of us, calculate our current expenses and plan for the same amount during our retirement days as well. This would be a big mistake.
Assuming our current monthly expenses are ₹25000. We, when planning, plan for the same amount of expenses 20 years down the line. That's not how it should be done.
If your current expenses are "X", then your future requirement will be "X + Inflation impacts"
If your current expenses are "X", then your future requirement will be "X + Inflation impacts"
Example :
IF
your current expenses are ₹25000 per month,
you have 20 years for your retirement,
inflation - 5% per year
THEN
You would need ₹66332 as your monthly expenses post-retirement
ELSE
if you plan for the same ₹25000, the actual purchasing power would be just ₹7000
IF
your current expenses are ₹25000 per month,
you have 20 years for your retirement,
inflation - 5% per year
THEN
You would need ₹66332 as your monthly expenses post-retirement
ELSE
if you plan for the same ₹25000, the actual purchasing power would be just ₹7000
The same applies to your investments as well. While calculating returns, you have to subtract the inflation rate and the net % is your actual returns.
Ex: If your deposit earns 6% per annum and the inflation rate is 5%, your actual returns is only 1%.
Strange is it?
Ex: If your deposit earns 6% per annum and the inflation rate is 5%, your actual returns is only 1%.
Strange is it?
How to calculate:
If your retirement planning requires an annual CAGR of 10%, your actual annual returns should be 15% (10% req + 5% inflation).
That's how we should calculate the requirements and goals while planning financially.
If your retirement planning requires an annual CAGR of 10%, your actual annual returns should be 15% (10% req + 5% inflation).
That's how we should calculate the requirements and goals while planning financially.
Inflation is something that is beyond our control. But investments arent. We can control how much we can invest, where we can invest and how we can invest. I am aware that the returns cannot be controlled (unless you invest in safe products like FD/RD etc)
So, in conclusion, if you are investing for your future, PLEASE ACCOUNT FOR INFLATION while planning for the same.
Inflation is the "Elephant in the room" that we should not ignore but choose to do so.
Save more and invest in products that beat inflation year on year.
Inflation is the "Elephant in the room" that we should not ignore but choose to do so.
Save more and invest in products that beat inflation year on year.
Don't let inflation be a villain of your happy life after retirement.
Please RT and share. Happy to clarify your doubts if you have any. 🙏🙏🙏
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Please RT and share. Happy to clarify your doubts if you have any. 🙏🙏🙏
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