How inflation and returns impact your financial goals?
There are some financial goals that every individual has in their life, and the most important of them are:
- Child education
- Retirement goals
We can understand the situation with the help of an example:
There is a person named Suresh, and he wishes to provide Rs 20 Lakhs for his son’s education and Rs 10 Lakhs for his wedding. Suresh’s wife is three years younger than him, and he wishes for 50,000 for his retirement plan according to the cost plan that’s going on currently.
Right now he is 35 years old, and he hopes to retire when he is 60 years old whereas his son is two years old and Suresh would want to provide this amount of money for his higher education.
As per the example given above, Suresh wants to provide the education money to his son after he turns 15 years old. So the value of 20 Lakhs in 15 years will be 63 Lakhs if we assume the inflation rate is 8%.
If Suresh doesn’t invest any amount till then in 15 years, he’ll have 17000 per month assuming the 9% returns.
What if the inflation rate is 10%?
If the inflation rate is 10% then in 15 years the value of 20 lakhs will be 84 lakhs. The chances are that the normal inflation rate will stay 6%, but the education inflation rate can go above 10%.
The investment will help Suresh in gaining more which is one of the most important reasons why inflation and returns are both important while planning the financial goals.
There are three essential things to keep in mind while planning the retirement goals:
- Inflation during the accumulation period
- Returns over inflation during the withdrawal period
- Life expectancy in general
Now we’ll have to think how much money Suresh will require if he thinks his monthly expenses will be around Rs 50,000 as per the current money trends which are going around.
If we assume the inflation rate at 6%, then the value of 50,000 will be 2.15 lakhs till the time he is 60 years old. Whereas to manage the monthly expenses, the corpus amount is around 6.2 crores.
So if the inflation after retirement is 6%, then the returns will be 7% in total.
What happens if the return over inflation is 0%?
Everyone has their own financial goals, and they want to have it all secured after retirement. Some people want to keep the corpus amount in debt instruments which is perfectly fine.
To beat the inflation rate, you will need some portion in the equity portfolio too. It is important to think through the financial goals rather than being scared of what it may bring in the future.
If you have time to invest in the things which will provide you returns then do it because it will help you in the future and also build a great financial goal for you.