Can your retirement corpus help beat inflation?

economictimes.indiatimes.com:

Sandeep has just turned 57 and is looking forward to his retirement in the next three years. He is proud of the fact that he has accumulated a sizeable corpus by investing diligently in the PPF, EPF and equity mutual funds. Over the past 20 years, he has made these choices after considerable research and deliberation.

However, owing to the rising inflation on all fronts—real estate, health, and fuel—he now wonders if his corpus will end up being smaller than the one he had planned and would need in his retirement. What should he do? Sandeep took all the right decisions by starting early, saving regularly and keeping his retirement corpus untouched till retirement. However, the adequacy of his retirement funds will depend not on his past savings, but on future inflation.

Assuming that Sandeep lives for another 30 years, his retirement income would be similar to his first salary. Good to begin with, but too small as time goes by. It takes both maths and a set of assumptions about the future to make an estimate about the adequacy of his corpus.

Many retirees make the mistake of comparing the return on a safe investment with inflation, to satisfy themselves. So, Sandeep might assume that a government saving scheme, which offers an 8% annual return against 7%annual inflation, will be adequate to take care of his post-retirement needs. This, however, ignores the fact that the interest income is a simple rate, while inflation is compounded every year.

This would mean that Sandeep’s large corpus would become smaller in real terms as the years roll by. Therefore, he needs two strategies. First, he should make sure that he dips only into a small portion of his retirement income.