Inflation or price rise is something most people experience. In the last three years, cost price inflation (CPI) data indicates the prices have risen on an average of 8 per cent annually. For example, a product that costs ₹ 10,000 today, at 8 per cent constant inflation, will cost you ₹1 lakh after 30 years! Yet for many, inflation does not seem to be a factor to take into account while planning for retirement; this is especially true for young adults.
In the recent survey conducted by Reliance Mutual Fund along with Indian Market Research Bureau (IMRB) and Digital TGI, only 40 per cent of the targeted respondents had cited rising inflation as the reason for buying retirement plans.
So what exactly should you do?
You have no option but to work towards self-sufficiency as you grow old. You need to start planning immediately and building a corpus large enough to support you till the end. Save adequately for the expected and unexpected expenses and invest wisely to create wealth over your working life.
Don’t be too conservative Keep in mind three things while planning your retirement. First, do not be very conservative with investments. The cost of investing too conservatively may be very high, especially in the long run, as in the case of retirement.
For instance, ₹5,000 invested every month over the next 30 years (a total savings of ₹18 lakh) would amount to just ₹61 lakh, if invested at 7per cent. The same amount would become ₹3.46 crore, if invested at 15 per cent.
Second, it may be prudent to consider taking some equity exposure to enhance your returns. The younger you are, the longer the time you have before you retire. You could thus take on more risk that may give you higher returns. The traditional rule of the thumb states that 100 minus your age should be the ideal equity exposure; if your age is 30, your equity exposure should ideally be 70 per cent.
Third, you don’t have to be very conservative, post-retirement. While your earnings would have stopped completely and your risk appetite would have reduced substantially, it may not be wise to invest only in conservative assets after retirement. Remember that even after retirement, you have to ensure that your retirement corpus does not erode due to inflation. Therefore, a marginal allocation, say, 20 per cent in equity can be considered even after retirement.
The writer is Deputy CEO, Reliance Capital Asset Management