If you have watched Amitabh-Hema starrer “Bhaghban”, you would have sympathised with the retired couple and their travails. In one of the early scenes in the movie, when the character played by Amitabh is to avail a loan from his provident fund account, when he is asked about the appropriateness of his action, he quips that his children would take care of him! Personally, I think “Bhaghban” is an ideal guide for planning your retirement or rather how not to approach your retirement planning with such a casual attitude. And in the movie Amitabh plays the role of a banker!!
More than retirement planning per se, I want to highlight how the deadly silent killer called inflation would play a spoilsport with your retirement plan.
Inflation is variously defined by economists but for our discussion, it could be defined as a situation wherein there is an increase in the overall level of prices over an extended period of time.
As an individual you will have no control over inflation; however you will be greatly affected by it, more often adversely.
During your earning period, there are several ways you will be able to mitigate the effect of inflation, rising wages being one of them. However, it’s during retirement period, the effect of inflation would be magnified because your income is not automatically adjustable for inflation; you need to plan for this event.
Let’s suppose that during the first year of your retirement, you will need Rs.2.5 Lakhs to meet your needs. If there is an inflation of 5% in the economy, the general level of prices would increase by 5% in the next year. However, this will not happen abruptly let’s say on the first day of the New Year but very gradually. That’s why inflation is a silent killer. In the next year you will need Rs.2.62 Lakhs to maintain the same standard of living because all prices have gone up 5%. But returns from your investment (typically you would have invested in those investments which give a fixed and/or assured return) will not increase by 5% to offset the effect of increase in price level. This means, you will need to dip into your corpus (capital invested) or reduce your standard of living or a combination of both. You will not be happy with lower standard of living and if you dip in to your capital, you may end up with a situation with no corpus left out. It’s scary to be in this catch-22 situation. It’s even scarier because you have absolutely no control over the unfolding economic situation because you are neither the finance minister nor the governor.
How one would break this catch-22? Financial planner knows that inflation is a fact and it can not be wished away. One can not live with the situation also. So it’s to be managed carefully. Like an orchestra, many things have to happen simultaneously.
There are several strategies a retiree has to adopt in such a situation. Estimating impending inflation is easier said than done, that too when the plan is to be put in place several decades earlier to actual retirement. Other option would be to attempt to create a big corpus wherein the returns would be always more than the needs. Question is can this be achieved by all? What if the resources are limited? It is here the attitude of the investor plays a major role. With the help of financial planner, she must chose the type of assets she will own during her retirement period carefully so that overall income generated by the assets is always ahead of inflation. There are several such assets that are likely to generate a return adjusted for inflation – equity, growing annuity etc.
There is no substitute to the awareness of the fact known as “inflation” and being prepared to face it squarely with the help of your financial planner. Investor must also know the importance of ‘inflation-beater’ assets and should make them part of the overall portfolio both during the wealth accumulation/growth phase as well as wealth erosion/depletion phase.
