How inflation can shrink your retirement corpus and what you can do about it

Planning for an independent retirement with zero income requires a thoughtful, realistic approach.

Inflation in the economy reduces individuals’ purchasing power and diminishes real returns on their investments, among other things.

It is also an important factor to be kept in mind while building a retirement corpus.

Retirement should ideally be a period of peace and fulfilment, free from financial stress. However, the reality of maintaining a comfortable lifestyle with increasing costs while having zero income can be daunting. Let's look closely at projected monthly expenses due to inflation over the next two to three decades, to understand what it truly means to be prepared for a zero-income retirement.

Inflation impact on monthly expenses

Inflation, simply put, is the gradual increase in the cost of goods and services over time. Even a modest 6 percent annual inflation rate can significantly increase monthly expenses over 20, 25, and 30 years. While inflation is a natural economic phenomenon, it can pose a real challenge in retirement planning because we must anticipate higher future costs for the same lifestyle.

Here is a breakdown of how today’s expenses can escalate over the coming years:

For individuals planning a retirement with zero income, the challenge is ensuring their accumulated funds will be sufficient to cover these inflated expenses without running out. Retirees risk exhausting their retirement corpus far sooner than anticipated by failing to account for inflation. Let’s consider some practical ways to think about these expenses in retirement planning:

Plan beyond basic needs: Retirees often envision covering basic expenses like food, utilities, and healthcare. However, lifestyle-related expenses such as travel, entertainment, and gifts for family are often overlooked. With inflation, even these “secondary” costs can become primary concerns. A Rs 70,000 expense covering essentials and lifestyle today could climb to over Rs 4,00,000 in 30 years, stretching a retirement corpus.

Also read | Retirement planning in your 40s: Why this is the right time and here’s what you need to do

Longevity risk: Today, many people are living well into their 80s and beyond. This increased life expectancy means retirees may need to plan for 25-30 years post-retirement. With inflation steadily increasing, they must ensure their savings can last through these extended years without compromising their standard of living.

Health-related expenses: Healthcare costs tend to rise faster than general inflation. It’s crucial to remember that a 6 percent general inflation estimate may be conservative for healthcare. Factoring this into your future monthly budget is essential for a financially stress-free retirement.

Also read | Tax planning for 2025: How to maximise your savings before March 31 deadline

The psychological impact of rising costs

As the numbers demonstrate, what seems like a substantial retirement corpus today may not suffice in 20-30 years. Financial planning is not just about numbers; it also has a psychological dimension. When coupled with a lack of income, rising costs can lead to financial stress. To manage this stress effectively, retirees should have realistic expectations about their future expenses and be mentally prepared for the lifestyle adjustments inflation may necessitate.

Avoid common misconceptions

"I can cut down on expenses in retirement”: Many people think they’ll naturally spend less once they retire. However, while some costs might decrease, others, like healthcare, may rise. Planning for higher costs, rather than assuming reductions, is a safer approach.

“My corpus will suffice as long as I budget wisely”: Budgeting is important, but inflation can outpace even the most carefully laid plans. Without adjustments for inflation, retirees could find themselves depleting their savings faster than expected.

“Emergency funds are only for the working years”: In reality, unexpected expenses don’t disappear in retirement. Inflation-driven price hikes can make an emergency fund indispensable, even in retirement, to cover sudden costs without dipping into the primary retirement corpus.

Also read | Rupee depreciation: How Indian students can minimise impact on overseas education budget

How to prepare for a comfortable retirement

Inflation is not just a financial concept; it’s a real factor directly affecting our day-to-day lives. By understanding how even a 6 percent inflation rate can drastically change the cost of living over 20, 25, and 30 years, retirees can plan more effectively for a comfortable, independent future.

In essence, planning for an independent retirement with zero income requires a thoughtful, realistic approach. It’s about ensuring that your investments and corpus meet your future needs without depleting too quickly. As the data illustrates, inflation is a powerful force that must be accounted for. Understanding the impact of rising expenses today can pave the way for a financially secure, independent, and fulfilling retirement tomorrow with zero income.

The writer is a personal financial mentor with over 25 years of experience.

Disclaimer: The views expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.