SIP Investment: Many people make mistakes when it comes to planning for their financial future. They do not take into account the rise in inflation and set goals that are not feasible. Even today, a corpus of Rs 1-2 crores would look big for their future needs of 20-25 years, and based on this assumption, they start investing their income in specific schemes.
SIP investment for stress-free retirement: Why inflation can change your retirement goals
Mayank, a 30-year-old young professional, wants to accumulate a significant amount for his retirement in the future. Mayank has set his retirement age at 55, which gives him 25 years for investing. In the first phase, Mayank calculated his target amount on the basis of the current value, and he thought that an amount of 1.5-2 crores would be sufficient for his retirement.
However, after consulting a financial advisor, Mayank realised his mistake, as he, along with many others, had not considered inflation while planning for his retirement. Mayank thought that an amount of 1.5-2 crores would be sufficient for his retirement, as it seems today, without considering the value of the amount in the future.
The financial advisor explained that, given the current rate of inflation, the value of money after 25 years would be only around 33 per cent of its present value. In simple terms, if you think Rs 1 crore is enough today, you may need more than Rs 3 crore after 25 years to maintain the same lifestyle
It’s not just Mayank; many people make similar mistakes when planning for their financial future. They often fail to adjust their goals for inflation and end up setting unrealistic targets. Even today, a corpus of Rs 1-2 crore may seem large for the next 20–25 years, and based on this assumption, they start investing a portion of their income in selected schemes. However, you can estimate your future financial needs more accurately by factoring in inflation.
r = Annual rate of inflation
Current Value: Rs 1,00,00,000
Inflation Rate: 4.5 per cent per year
After 25 years, the real value of Rs 1 crore would be around Rs 30 lakh in today’s terms.
Present Value vs Future Cost: Understanding the Impact of Inflation
Cost of any expense today: Rs 1 crore
Inflation rate: 4.5 per cent per year
Future Cost of the same expense:
After 20 years: Rs 2.6 crore
After 25 years: Rs 3.3 crore
After 30 years: Rs 4.3 crore
This clearly shows how inflation gradually increases the cost of living over time, making it essential to plan your investments accordingly.
Assume that your investment tenure is 25 years, and you are ready to invest Rs 10,000 every month. If we assume that your rate of return is 12 per cent, you could accumulate approximately an amount of Rs 2 crores by the end of this period, in case you don’t consider inflation.
However, once you factor in inflation, this amount reduces to Rs 70-80 lakh. This means that you will be achieving only 28-30 per cent of your actual goal.
This is a clear example of how you need to factor in inflation for your investments. For proper financial planning, you need to keep your goals in mind, considering inflation-adjusted returns rather than nominal returns.
Smart tips for SIP investors
- Start Early: Don’t delay. The earlier you start, the more you benefit from compounding.
- Increase Your Investments: As your salary increases, increase your SIP amount annually.
- Stay Invested for Long: Invest for at least 8-10 years for maximum returns.
- Invest in Diversified Funds: Invest in equity or flexi-cap funds, which are diversified across different sectors.
- Avoid Early Withdrawals: Try not to withdraw your investments midway; stay invested for the long term.
Read more: SIP Plan: Start at 35, build Rs 82 lakh in 15 years – A smart retirement strategy by 50
(Disclaimer: The above article is meant for informational purposes only, and should not be considered as any investment advice. ET NOW DIGITAL suggests its readers/audience to consult their financial advisors before making any money related decisions.)
