Beat Inflation! Start Retirement Planning Now
Inflation wreaks havoc with your savings and erodes the value of your money. It’s very critical for you to begin retirement planning immediately to avoid a strain on your finances in the future.
What is Inflation: In economics, inflation is defined as the rise in the general level of prices of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys lesser units of goods and services.
Therefore, inflation is a reflection of the erosion in the purchasing power of money. Inflation is generally measured using price indices like Consumer Price Index. Most economists agree that inflation is necessary for an economy to grow. The modern trend is to favor a low single digit rate of inflation between 2 and 4 per cent. This is regarded as the ideal rate of inflation.
How inflation affects retirement planning:
Retirement planning is an important part of financial planning nowadays. Inflation ensures that your money erodes in value over time. Hence when you choose a plan, you should take into account the effect of inflation on your future earnings.
Inflation is a big threat to your retirement planning because your targeted amount keeps getting higher and higher. This means you have save and invest more to pay for the same quality of life.
As a result, you will need to save more today to pay for higher priced goods and services in the future. Since everything you buy today will cost more in the future, the disposable component of your income will decrease which also affects your ability to save. The compounding effect of inflation can be as devastating as losing more than half of your money. However, if you start early and buy the right retirement plan and make sensible investments, you can ensure that same compounding effect works to your advantage rather than being a burden.
Basic rules of retirement planning
It is never too early to begin right planning. You should begin by defining your retirement goals and your need to start a retirement plan before you actually retire.
The simplest way of figuring out an ideal plan is to follow the four steps given below.
Step 1: Decide how much income you require to live comfortably, post-retirement. A general rule is that you will need to ensure that your post-retirement income is between 70-80 percent of your current income. For example, if you’re making Rs 30,000 a month, you will need a pension in the range of Rs 21,000 to Rs 24,000 a month to maintain your standard of living. Also remember to take into account aspects like increased medical costs and other lifestyle expenses you could incur.
Step 2: Calculate the amount you will receive at the time of your retirement.
Step 3: First research and then choose the right plan that enables you to meet your post-retirement requirements. Invest in asset classes, which can provide you with potentially higher returns in the long run.
Step 4: Start investing and retirement planning early so that time is on your side and you can truly leverage the power of compounding.