Let’s start this article with an understatement. Inflation in India is high – consumer prices were up 7% compared to a year ago. While inflation is usually associated with higher costs for travel, groceries, and other living expenses, many might be wondering: Could inflation also break my retirement nest egg?
Inflation means a rupee today can buy fewer groceries and other household staples than a year ago. Against the backdrop of high inflation (and interest rates) as well as uncertainty over global economic growth, those looking to retire need to do the following things:
Re-examine financial plan
When you arrived at your target retirement goal, you must have factored in a basic inflation rate in your calculations. If you had been too conservative in your inflation estimates, it’s time to get more realistic.
The CPI inflation rate is calculated from the prices of a generic basket of consumer goods. However, your retirement consumption basket might be very different. So, what matters is the personal inflation rate.
Not just that, you should also consider rising long-term healthcare costs – given that seniors are more likely to incur higher healthcare expenses than the youth.
RBI forecasts a long-term consumer inflation rate of 6% per annum; however, inflation has often gone out of control. So, it is better to factor in an inflation rate of at least 7% in your calculations on the safer side.
At 7% annual inflation, your monthly expense of Rs 50,000 per month today would become Rs 1.9 lakh in 20 years. And at 5% inflation, only Rs 1.3 lakh per month. So ensure you err on the side of caution and not otherwise.
Revisit asset allocation
Inflation has raised its ugly head now and then. Sometimes it has persisted and stayed at higher levels for many years, eroding consumers’ purchasing power.
You mustn’t panic and resort to short-termism. Instead, stick to your asset allocation and continue with your SIPs. If you think your SIP investments will not take you closer to your retirement goal, consider increasing allocation to equities.
Equities among all asset classes provide the best opportunity to earn inflation-beating returns for your portfolio. Even in retirement, one can hold up to 50% in equities and scale it down over time.
On the other hand, if you think you have very high exposure to equities, a substantial market fall can delay or impact your retirement income. So the proverbial glided path to retirement is the way out to reduce equity exposure and mitigate the risk.
If you are running a loan – car, personal, education, or otherwise – prepay it as soon as possible. With most of these loans linked to Repo rates, they have already become costlier.
Put all the extra cash and money to good use. All loan-based purchases should be delayed for now – given that higher EMIs are likely to make them unaffordable.
If your portfolio is too concentrated, diversify into other less correlated assets. It reduces portfolio risk. If you are too high on equities, invest in bonds that are also high-yielding. It can also provide a cushion against volatility.
Moreover, you may consider diversifying across sub-assets, for instance, by diversifying across the market capitalisation of stocks.
Either invest separately in large and midcap equity funds or choose multi-cap funds that invest across the market capitalisation of stocks. Also, consider traditionally considered inflation hedges like gold and real estate investment trusts, if need be.
At all times, you mustn’t stay on the sidelines. Money idling in the savings bank account over some time erodes wealth and is better invested in stocks or bonds.
Cut down on discretionary spends
Keep investing towards your retirement goal and if you think inflation has reduced your spending power, cut down on discretionary spending.
Check if there is room to bring your household budget under control by cutting back on leisure travel and dining. You can also hold back on large expenditures such as home renovations or car purchases.
If you are on the verge of retirement, consider working for a few more years.
High inflation is a clarion call for those avoiding equities in their retirement portfolio. It’s time to revisit your inflation assumptions and asset allocation and make necessary modifications.