The answer is inflation.
You can't AVOID inflation:
For the price increases to qualify as inflation, the rise in price has to be a sustained one. With time, for every rupee you own, you'd be able to buy a smaller percentage of good or service.
When inflation begins to march north, there tends to be a decline in the purchasing power of money. Let us consider the inflation stands at 5% annually. Theoretically, bottle of water costing Rs.20 today, would cost Rs. 21 in a year.
It is possible to control inflation and it is not possible to stop or avoid inflation.
How can you handle Inflation?
Inflation affects each person differently. As we progress in profitable positions in work, typically the amount we spend also begins to soar. While certain lifestyle changes with time are unavoidable, remember that every spending decision taken today can affect your finances of tomorrow. Read on to understand how we can combat the detrimental effects on inflation.
Handling Inflation During pre-retirement:
Inflation can be best handled with the right investments.
Avoid excess spending and invest a percentage from your increased salary. Evaluate your budget and earmark specific areas of expense. Try to forecast your expenditure and work towards minimum deviation from your planned income to expense ratio.
Design a lifestyle that suits your requirement. Decide how much you want to spend on luxuries. As you inch closer to the retirement finish line, ensure that your luxury needs are at the minimum.
Try and work towards an annual growth in income generation. Explore new opportunities and ventures to augment your income.
Pre-retirement investments and inflation:
Remember that it is not enough if your investment makes sense; it also needs to make cents!
Don't keep money stagnant in your safe. In fact, with time its value depreciates. What you can buy with Rs. 100 today will cost you Rs. 150 after a 6 or 7 years.
When you make an investment, ensure that the rate of return is higher than the inflation rate. The difference in inflation rate and investment return rate is your actual return on the sum invested.
Inflation trends have a profound effect how each portfolio needs to be structured. Allocate your assets based on your risk return expectations. Higher the risk, higher the returns. Embrace equities for long term.
Proven Diversified Equity Funds: This investment option can churn good returns if you have a good appetite for risk, as the returns range an average 12-15%, which can suffice to beat inflationary trends.
Focus on what return your investment will yield post tax and invest wisely.
Inflation during Post-retirement:
"Inflation is the crabgrass in your savings." -Robert Orben. Failing to anticipate the effects of inflation on retirement finances can be a costly mistake. While it is important to keep investing after retirement too, the tolerance to risk also needs to be phased down.
Plan for a fund that will sustain in your sunset years
The inflation rate needs to be factored while deciding on the corpus fund.
You need regular income after retirement. This regular income need to increase year after year to take care of the inflation.
Creating a corpus that can provide regular income year after year.
Creating another corpus, that can help in providing additional regular income that can take care of inflation.
What we need to understand is that the investment strategy after retirement is not to beat the inflation with investments; but to meet the inflation with investments.
Inflation is what every economy suffers from. It creeps on us with time. If not planned, it can sting us very hard. But as economists say, inflation is nothing to dread. Healthy rate of inflation has a positive impact of increasing consumption and keeps the capital in the economy flowing.
An important Mantra:
Invest your money and don't lock it up only with safe investments. The money safe in your ‘safe' will not yield returns that can save you from inflation. For becoming a well disciplined investor and achieve your financial goals, you need to focus of creating a financial plan.
The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Director and Chief Financial Planner of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at firstname.lastname@example.org