3 ways in which inflation plays spoilsport in your retirement planning

Updated: 27 Nov 2022, 01:46 PM IST

Inflation is affecting your daily lives, but also your long term financial plan. Here we explain how inflation is disturbing your retirement plan and your expected returns.

Inflation has an adverse effect on our purchasing power but also majorly on our savings and investments.

In India, 2022 has not been a good year for financial planning. By calculating through CPI, inflation rate shows a rapid growth after the month of March. The average inflation rate was floating above 6.50% till October.

Inflation has an adverse effect on our purchasing power but also majorly on our savings and investments. Especially when your financial planning involves critical investments like retirement plans. Retirement planning means an investment plan which helps you in surviving the regular expenses and maintaining the same lifestyle even after your retirement, or when you do not actively earn income.

Reduction in SIP amount

High inflation prevailing in the country leads us to spend more on our necessities. Now our basic income is the same but our expenses have increased due to high rates of necessity-related products. In such a situation we are left with the only option of reducing our SIPs to deal with our regular expenses. When you reduce your SIP amount, you need to expand your time horizon of financial goal, i.e., retirement.

Negative returns

Negative returns given by the securities in which your fund manager has invested in. A breakdown in consistency in return on your investments would slow down the corpus growth, due to which you have to increase the time horizon of your investments to reach the pre-decided amount of retirement corpus. If you cannot increase the time horizon, you have to settle with less or when the inflation cools down, you have to invest aggressively by increasing the amount of your SIPs.

Emergency effects

If the situation keeps worsening, you might have to face job loss or remain unemployed for a longer period of time. Because of such a financial crisis, you have to use your savings and investments to meet your financial obligations and regular expenses, which might be the primary reason why you could not focus on your retirement plan as the priority is concentration on current financial situation rather than future one. Your emergency financial needs lead you to the lack of consistency in making retirement investments in continuity.

Inflation, irrespective of the investment plan you pursue, whether lump sum or SIP, will affect your retirement plan while reducing your net return on investment. However, there is no economic growth without inflation, it is unavoidable and generally investors consider the average inflation rate before making an investment. It helps them in computing net return on investment.

Problems arise when an economy is facing an abnormal situation of inflation, a higher rate of inflation than what the usual rate should be. It causes various other problems like unemployment, job loss, slow down in business growth, and no further job opportunities. It multiplies financial crises in many ways.

Your long-term plan affects majorly when a financial crisis in the economy arises, it becomes worse when it continues for a longer period of time. In the current scenario, it seems like the economy is improving as the US inflation rate is cooling more than forecasted.

Anushka Trivedi is a freelance financial content writer. She can be reached at anushkatrivedi.com

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First Published: 27 Nov 2022, 01:46 PM IST