How Does Inflation Affect Retirement Planning?

Inflation Affect Retirement Planning

The market is often uncertain and we might or might not always be able to predict what happens next. Take the great recession of 2007-08 for example. It was impossible to fathom the great fall and the repercussions of the same. People lost faith in the market and the prices of investments dropped massively. 

Similarly, our investments can be affected by the changes in the market especially the great rise or fall. However, being prepared for such events can be extremely beneficial. 

Inflation Affects Retirement Planning

Let us first understand the concept of inflation. Inflation is the gradual loss of a currency’s buying value over time. The increase in the average price level of a basket of selected goods and services in an economy over time may be used to calculate a quantitative estimate of the pace at which buying power declines. A rise in the overall level of prices, which is frequently stated as a percentage, signifies that a unit of money now buys less than it did previously.

Hospitalization expenditures account for about a quarter of your yearly income, excluding medications and rehabilitation treatments.

While this is a hypothetical scenario, it is a well-known truth that many families have been impoverished due to a lack of cash following a catastrophic medical emergency. That, however, is just part of the narrative. If the last several years are any indicator, the average percentage of your wallet devoted to consumption costs (living expenses) will continue to rise.

This essentially indicates that your ability to save money, as well as the quantity of products and services you can obtain for a certain amount of money, decreases proportionately with time.

How Can I Protect My Retirement from Inflation?

In order to protect your retirement, it is essential that you start early. In the case of an emergency, you should have enough liquid savings, or cash, to cover three to six months of living expenses, as well as funds for any other anticipated purchases, such as the purchase of a home. 

Then when you are closer to retirement safeguard yourself against a stock market shock in the early years of retirement, consider transferring a bit portion of your portfolio into safer assets, such as fixed income, in your 50s.

This way, when you approach retirement and are no longer earning, you will be drawing money from your retirement savings once you have stopped working. 

Why Is Inflation an Important Aspect of the Retirement Planning Calculation?

At the time of retirement, inflation will have increased your present living costs to a considerably greater level. As a result, your retirement fund must sustain you for the next two to three decades of your retirement life, at current higher costs.

The failure to account for the ‘time value of money,’ or the diminished worth of money over time, will result in financial difficulty throughout your retirement years. Because your retirement fund was insufficient and eventually ran dry during your golden years, you may struggle to make ends meet, cut costs, or rely on family help.

What Are the Factors Affecting Retirement Planning?

Here are the factors that will affect retirement planning:

  1. Investment Volatility
  2. Low Interest Rates
  3. Reduction of Employer-Provided Retirement Benefits
  4. Reconfiguration of Government-Sponsored Programs
  5. Increased Longevity
  6. Inflation
  7. Incom taxes

Retirement plans are an important decision and choosing the right plan is crucial. It is advised to seek expert advice when choosing retirements so that you do not lose out on your money. Factoring in the right kind of possibilities is also essential and hence one must seek expert advice. 

Need Help for Retirement Planning?

If you are looking for an effective retirement or pension plan, get in touch with us below. Let us help you find your stress-free retirement. Visit retirement planning consulting services or Just Call us on +91 20 25551000 for more details.

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