1. Inflation
needs to be factored into any prudent retirement plan.
2. Think
of inflation as a negative compound interest slowly eating away at your assets.
3. Annual
inflation of 5% over 20 years divides the real income by a factor of 2.65.
4. Rule of 70 is also 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.
5. Due to 7% inflation, our current expenses will double every 10 years.
6. Similarly, due to 6% inflation, purchasing power of 1 crore term cover for our family reduces to 40 lakh in 15 years.
7. While
you are earning, you need to earn as high real return (nominal return / coupon
rate minus inflation) as possible.
8. Factoring in inflation 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.
9. Remember:
a) A "sticky" 7% inflation will reduce our corpus to half in 10 years.
b) 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.
c) 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%.