Retirement planning: It’s better to be roughly right than precisely wrong

livemint.com:

retirement planning. Because one might not be able to resume work in their retirement years, and by then, it might be too late to recover from the perils of a low retirement corpus. The essential factors to consider while planning for retirement corpus are retirement expenses adjusted for inflation, expected returns, and life expectancy.

So, to avoid running out of money in retirement, one is advised to follow conservatism, a term borrowed from accounting principles which factors in worse-case scenarios. Using this principle when one is planning for retirement, they should factor in experiencing higher inflation, lower returns, and higher life expectancy. That way one could avoid running out of money during the retirement years.

Inflation is a hidden tax that erodes the value of our savings, and it’s almost impossible to estimate. So, how much inflation should one consider while planning for retirement? Every individual or family’s consumption basket could differ from others’, and hence, the level of inflation they face might vary from the general inflation in the economy. As an academic exercise, if one wishes, they can break down their expenses into consumption items and estimate the future inflation for each by observing past trends.

However, by all measures, this method would be precisely wrong because, as individuals age, their consumption basket is likely to change. Being roughly right involves considering the inflation targeted by the central bank (RBI, in our case) to maintain stability. In the case of India, this target is between 2% and 6%.