1. The "decompounding" impact of inflation is evident by this SIP reckoner:-
a) For accumulating 1 Crore corpus in 30 years, at 17%/15%/13%/11% CAGR, monthly SIP of 1000/2000/3000/4000 will be required at 0% inflation.
b) For accumulating 1 Crore corpus in 30 years, at 17%/15%/13%/11% CAGR, monthly SIP of 9000/15000/23000/36000 will be required at 8% inflation.
2. Rule of 70 is useful for predicting future buying power - by dividing 70 by current inflation - to know how fast our investment will be reduced to 50% of its present value.
3. Therefore, we shouldn't plan our future on nominal values, as is evident from these "decompounding" figures:-
a) A "sticky" 7% inflation will reduce our corpus to half in 10 years.
b) Similarly, due to 7% inflation, our current expenses will double every 10 years.
c) A "safer" 6% inflation will shrink our 1 crore corpus to 54 lakh after 10 years, 29 lakh after 20 years, and 16 lakh after 30 years.
d) Similarly, due to 6% inflation, purchasing power of 1 crore term cover for our family reduces to 40 lakh in 15 years.
e) Even a "minimal" 5% inflation can widen our nominal and real income gap to almost 20% in just 5 years, and in 40 years, this difference will widen to 80%.
4. Factoring in its impact is very important while setting even short-term goals, and its assumed rate should depend on the goal itself - healthcare and education costs may gallop at 15% and 12%, while long-term food inflation may not be so high - besides changes in the spending pattern and rupee depreciation as well.
5. Hence, an auto-pilot financial planning may be hazardous, needing goal review and course correction, after setting an accurate target by estimating the present value of the goal and then finding its future value by factoring in a reasonable inflation rate.
6. It is better to err on the side of caution while setting the target, and aiming to save a little more than the anticipated value.
a) For accumulating 1 Crore corpus in 30 years, at 17%/15%/13%/11% CAGR, monthly SIP of 1000/2000/3000/4000 will be required at 0% inflation.
b) For accumulating 1 Crore corpus in 30 years, at 17%/15%/13%/11% CAGR, monthly SIP of 9000/15000/23000/36000 will be required at 8% inflation.
2. Rule of 70 is useful for predicting future buying power - by dividing 70 by current inflation - to know how fast our investment will be reduced to 50% of its present value.
3. Therefore, we shouldn't plan our future on nominal values, as is evident from these "decompounding" figures:-
a) A "sticky" 7% inflation will reduce our corpus to half in 10 years.
b) Similarly, due to 7% inflation, our current expenses will double every 10 years.
c) A "safer" 6% inflation will shrink our 1 crore corpus to 54 lakh after 10 years, 29 lakh after 20 years, and 16 lakh after 30 years.
d) Similarly, due to 6% inflation, purchasing power of 1 crore term cover for our family reduces to 40 lakh in 15 years.
e) Even a "minimal" 5% inflation can widen our nominal and real income gap to almost 20% in just 5 years, and in 40 years, this difference will widen to 80%.
4. Factoring in its impact is very important while setting even short-term goals, and its assumed rate should depend on the goal itself - healthcare and education costs may gallop at 15% and 12%, while long-term food inflation may not be so high - besides changes in the spending pattern and rupee depreciation as well.
5. Hence, an auto-pilot financial planning may be hazardous, needing goal review and course correction, after setting an accurate target by estimating the present value of the goal and then finding its future value by factoring in a reasonable inflation rate.
6. It is better to err on the side of caution while setting the target, and aiming to save a little more than the anticipated value.