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Foundations

Inflation Linked Investments

Are retirement websites (and retirement calculators like mine) overdoing it? A 35 year old, with an expense of 8 lakhs a year today, will need to build up a corpus of Rs. 4.84 crores just in order to get the same quality of life, assuming retirement is at age 60 and a person is expected to live till he’s 80. This makes sense – because at 6% inflation, the 800,000 you spend today will go up to 51 lakhs (5.1 million) per year in 25 years.

The next part is tricky. Assuming a 12% long term return, you then need to invest 25,000 per month to get there, is what most calculators tell you. But is that really true?

No. Not in real life.

With inflation, your income is likely to go up as well, and therefore the ability to save increases at least at the same level as inflation. That means if I can save 25,000 per month today, I can save 26,500 per month in 2011, and 28,000 in 2012 and so on.

If I put those savings in, a quick excel table tells me I will generate a corpus of more than 7.35 crores in 25 years. That’s way more than I need.

Saving 25,000 a month for 25 years: 7.35 crores 

Inflation linked savings

To generate the 4.84 crores I need at age 60, with a saving increasing with the same 6% inflation, I need just Rs. 16,500 a month. That’s a whopping 34% lesser!

Saving 16,500 a month for 25 years: 4.85 crores 

Consider Different Retirement Costs

Consider also that costs are lower when you’re retired. You probably don’t have a home loan (or rent) to pay. Your kids are out of home and won’t need your support. You can’t digest heavy food or too much alcohol, so your restaurant bills will be lighter. On the flip side, you’ll travel more, your medical bills will be higher, and you’ll want to splurge on your grandchildren. And, you might even have an income at retirement – royalty from something you’ve written or patented, dividends from companies you’ve bought, rental income from a second house or even consulting income.

You don’t need that much

Chances are you don’t need to save all that much today – remember, I haven’t even considered the possibility of your getting promoted and getting a salary hike higher than inflation. The chances of that, in a growing economy like ours, is almost 100%. So if you get really conservative and save a lot today it may be utterly useless – saving too much is just as stupid as saving too little, because you give up today’s pleasures to enjoy life when you’re 60; what’s the point of lending to the future unnecessarily?

So go on, spend that money

I just saved you 34% off your retirement plan. Go on, spend it and buy that Nintendo Wii or Beach Holiday you’ve been putting off till retirement.

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