1. Rising inflation: Here is how much money you need to fulfil your financial goals

Rising inflation: Here is how much money you need to fulfil your financial goals

Investing should be tied to your short, medium and long-term goals. While it’s okay to be uncertain about some goals, there are certain goals – such as retirement – planning for which is mandatory.

Published: April 19, 2017 2:19 PM
Investing should be tied to your short, medium and long-term goals. (Reuters)

Adhil Shetty

If you have set yourself financial goals and are in the process of saving and investing, you must consider the impact of inflation on your money.

Investopedia describes inflation as “the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling.”

Simply put, the purchasing power of your money reduces every year. Owning Rs 100 in the year 2000 is the same as owning Rs 287 today*. Since the turn of the century, the average annual inflation rate in India has been 6.43%. If your savings and investments have a CAGR of less than 6.43% in this period, you are losing money.

Calculating Your Investment Needs

Investing should be tied to your short, medium and long-term goals. While it’s okay to be uncertain about some goals, there are certain goals – such as retirement – planning for which is mandatory. It is extremely important to account for the impact of inflation, else you will miss your goal by a wide margin. Let’s understand this with a few examples below.

Assumptions

For the purpose of calculations, we’ll assume the following.

Investor: Male, married, and 30 years old.
Fixed monthly expenses: Rs. 35,000.
Retirement age: 60.
Life expectancy: 75.
Child: 1, aged 3.

We’ll also assume:

Average inflation rate: 6.5%.
CAGR from investments: 10%.
Preferred investment tool: mutual fund SIPs.
Annual increase in SIPs: 10% (5000 in the first year, 5500 in the second, and so on)

Child’s Education

The investor’s child is currently three years old. Let’s say the child will want to do a four-year bachelor’s degree course, followed by a two-year master’s course. Let’s assume the annual cost today for undergraduate education is Rs. 4 lakh (or Rs. 16 lakh over four years), and post-graduate education Rs. 10 lakh (or Rs. 20 lakh over two years). Let’s assume the child will do his bachelor’s degree at age 18 and his master’s at age 22. This gives the investor 15 years to raise the corpus for the bachelor’s degree, and 19 years for the master’s. Here’s how it works out.

Cost Today Due In Cost When Due Increasing Monthly SIP
Rs. 16 lakh 15 Years Rs. 41.14 lakh Rs. 6,050
Rs. 20 lakh 19 Years Rs. 66.17 lakh Rs. 5,300

Wedding

Let’s assume that wedding costs today come to Rs. 10 lakh. The investor’s son, currently three years old, may marry around the age of 27. This gives the investor 24 years to build the wedding corpus. Here’s how it will work out.

Cost Today Due In Cost When Due Increasing Monthly SIP
Rs. 10 lakh 24 years Rs. 45.33 lakh Rs. 1,750

Retirement

Retirement planning is tricky. It needs you to invest over a very long term during which the plan will be tested by several instances of economic volatility, fall and rise in income, and increases in your financial responsibilities. You would need to ride past all these challenges and stay the course as you build your retirement corpus – all while resisting the urge to withdraw from the corpus for other needs.

Your current monthly income need is Rs. 35,000. Assuming all costs constant and an average inflation of 6.5%, at age 60 in retirement, you’ll be spending Rs. 2.31 lakh per month (or Rs. 27.72 lakh in the first year). At age 75, this requirement would increase to Rs. 5.95 lakh per month (or Rs. 71.4 lakh). Using these calculations, we understand that you’ll need to spend Rs. 7.43 crore in the 15 years of retirement.

This expense can be met by creating a corpus of approximately Rs. 2 crore. From 60 years to 75 years, each year of the retirement, the annual fund needs can be withdrawn while the rest ofthe corpus can remain invested in an instrument returning 8% per annum.

Here’s how you can get the corpus of Rs 2 crore

When planning for the long term, always take into account the impact of inflation. While inflation certainly increases your future money needs by a large margin, making targets seem unsurmountable. However, with disciplined and consistent planning, and by increasing your investment budgets each year, you can easily achieve your targets in the long term.

Cost Today Due In Cost When Due Increasing Monthly SIP
Rs. 35,000 30 years Rs. 2.31 lakh, rising by 6.5% annually to Rs. 5.95 in 15th year of retirement. Rs. 3,500

(The writer is CEO, BankBazaar.com. * Calculation as per Inflation Calculator India: http://bit.ly/2pw2bxf)

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