Do you get nostalgic about how we could buy a bar of chocolate for ₹10 in the 2000s that now costs more than double that amount? You are not alone. This is a clear, albeit simple, example of how inflation works.
Inflation results in the general price level of goods and services increasing over time, reducing the purchasing power of your money. Think this in the context of your long-term investments, and you could soon be saying goodbye to your early retirement plans.
The bottomline being that with inflation rising every year, you may need to rethink where you invest and how much.
What is inflation, really?
Inflation occurs when prices rise across the economy.
Don’t think of inflation as just the price of your favorite food going up. As a phenomenon, it affects prices across sectors and industries, and subsequently the economy of entire countries.
While a moderate inflation rate is expected, if left unchecked, it can be devastating for entire countries. Case in point Venezuela, where inflation hit over 1,000,000% a month in 2018 and the economy collapsed.
Saving money = losing money
When you keep your money in your savings account, you receive an interest of about 4%. Pit that against a conservative inflation rate of 5%, you are already losing money.
So, what does that tell you?
Keep that hard-earned money saved in your savings bank account isn’t going to help your case when you are 50.
Building your retirement fund
It’s not too difficult if you plan well in advance. The earlier you begin, the easier it is.
1. Inflation rate
Refer to the Consumer Price Index (CPI), take an average and put that as your inflation rate when calculating how much you are likely to be spending after you have retired.
2. Round up your expenses
But before you start adjusting for inflation, you will first have to get a real view of what all your expenses can be, including maintenance costs for assets, healthcare in addition to usual living expenses.
Get a brief idea of how much money you need every month if you want to maintain a certain lifestyle.
3. Investment returns
Now, the most important part: after having calculated your expenses, you need to invest in the right places to have that money in your bank after retirement.
In an ideal scenario, your portfolio will be diversified across the board, including stocks, bonds, real estate and some alt assets to both mitigate risk and head towards your goals of getting returns.