Wealth managers and pension fund experts say investors often underestimate the impact of inflation when estimating their retirement corpus.
Factoring in future expenses and inflation, they say, is therefore important when determining how much to save and how to allocate investments for retirement.
The gap between what you plan for and what you’ll actually need
The core challenge is that retirement planning is often based on current expenses rather than their potential future value.
A 40-year-old retiring at 60 with current monthly expenses of ₹1 lakh could need anywhere from ₹2.5 crore to nearly ₹7 crore, depending on the inflation assumption used, says Anil Chopra, Group CEO, Wealth & Retirement at Bajaj Capital Group of Companies, an Indian investment services and wealth management group.
At 6% inflation, ₹1 crore’s purchasing power falls to around ₹31.2 lakh in 20 years, adds Ajay Kumar Yadav, CFP, Group CEO & CIO, Wise FinServ, an Indian private wealth management and financial planning company.
He says investors should consider not just the corpus required at retirement, but also the inflation-adjusted income they may need each year over their retirement.
The gap between the estimated and required corpus can be as high as 30–40%, based on client experience, says Neeraj Mahajan, Chief Business Officer, Godrej Wealth, a wealth management venture launched by the Godrej Industries Group.
Such a shortfall can become more significant as healthcare and other expenses rise with age.
Even a conservative 4% inflation assumption can leave some investors with a lower-than-required corpus, notes Sandeep Pandey, CIO (Fixed Income) & CSO, SBI Pension Funds, a pension fund management company.
He points out that over 85% of Atal Pension Yojana subscribers have opted for the minimum ₹1,000 monthly pension, which may not be sufficient to meet future living expenses as costs rise.
How much equity is too much?
There is no single allocation that works for every investor, with estimates ranging from single digits to nearly 80%, depending on the investor’s age, retirement horizon and cash-flow requirements.
Chopra says the simple “100 minus your age” rule would imply an equity allocation of roughly 40% at age 60.
Sumit Shukla, MD & CEO, Axis Pension Fund, a specialised retirement fund manager, is more cautious at 20–35%, provided near-term withdrawals are first set aside in liquid assets.
Yadav argues against reducing equity exposure too quickly, given that a 60-year-old may still have a 20–30-year retirement horizon, and suggests 30–45%. Pandey, citing NPS lifecycle funds, prefers 15–20%.
Parag More, CEO, Emkay Wealth Management, a specialised wealth and asset advisory division of Emkay Global Financial Services, suggests a more conservative 20–30% equity allocation for investors who are five years away from retirement.
For those still 15–20 years from retirement, however, he favours a much higher 70–80% allocation, citing the need for long-term growth and the limitations of fixed-income returns in keeping pace with inflation.
Building an inflation-proof portfolio
Most experts favour diversification rather than following a fixed allocation formula.
Shukla recommends organising investments “by purpose” — a liquid bucket for near-term expenses, debt and annuities for greater predictability, and equity for long-term growth, alongside 5–10% in gold.
Mahajan flags real estate as an asset that families may need to evaluate carefully, given that it is often one of their largest holdings and can be relatively less liquid.
Floating-rate bonds: not a direct inflation hedge
Floating-rate bonds can provide some protection against rising interest rates, but they are not a direct hedge against inflation. Taxation can also affect post-tax returns.
Chopra notes that RBI floating-rate bonds, at 8.05% p.a., may not beat inflation on a post-tax basis for investors in the 30% tax bracket. Most experts converge on 5–10% of the portfolio as a reasonable allocation.
Avoiding an overemphasis on nominal safety
Experts also point to the tendency among some investors to move heavily into fixed deposits or other relatively stable assets during periods of market uncertainty.
Shukla describes this as “confusing nominal safety with real safety.”
Yadav says the longer-term risk is that a portfolio may remain stable in rupee terms but fail to generate enough income to support the investor’s desired lifestyle in later years.
Pandey highlights the impact of starting retirement investments early.
For example, a ₹10 crore target by age 60 would require an investment of around ₹8,416 a month from age 20, compared with ₹1,00,085 a month from age 40, illustrating how the investment horizon can affect the savings required to reach a long-term target.
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