Your salary will increase with inflation too

by on October 29, 2010

I got this email early last week (slightly edited):

I would like to know something about annuity. I am 49 yrs old, suppose I am investing Rs. 100,000 yearly till i attain 60 years and NPS is showing growth in total of 1600000.
40% will be 6,40,000.
Now explain to me how annuity of 6,40,000 will help me for rest of my life?/for how long?/how much?
I am still confuse about retirement plan.
If I calculate inflation and I retired at the age of 60 yrs and live up to 75 years. What so ever I save for my retirement plan appears to be peanuts.
Thinking daily on “life after retirement” a am spoiling my today.

To me the heart of the problem is the sum that this person expects to accumulate when he is 60, and not the annuity itself because if you can accumulate a decent sum at the time of retirement, then you can do an annuity, fixed deposit, plan your withdrawal rate, whatever, but if you don’t have a lot at that age, then what is the point of thinking about anything else?
In that sense, I think this is slightly different from the earlier discussions we’ve had on this topic here.

In an economy like India where the inflation rate is quite high it is only reasonable to be worried about how inflation will eat into your retirement nest, however the other side of the coin is rarely talked about, if ever at all.

Your salary should also increase to match inflation and you should at least be able to increase your savings by the inflation rate or even if it is a smaller number, there should be some increase right? But this is too often not accounted for even when it’s quite clear that it can be quite a big number.

Let me give you an example: If you invest Rs. 1,00,000 per year for 12 years, and get 8% per annum returns on your investment, at the end of the 12 years you will have a corpus of Rs. 18,97,712, but if you increase your investment by 8% every year by age 60 you will accumulate about Rs. 25 lakhs, and one more year will make this sum go to Rs. 30 lakhs.

I’ve done these calculations here so you can see how I reached that number.

The key is not to be despondent, and start doing the right thing – better late than never right?

Ishita Sharma November 9, 2010 at 12:23 pm

Inflation â€“ The biggest enemy of your investment

The first thought that strikes â€“ How to tackle this Goliath? Many in the investor community wonder to what extend the inflation can affect the investments and in turn their present and future.

Shilpi Johri December 29, 2010 at 3:42 am

Very true…Inflation can eat up your nest egg before you realise.

When you start accumlating late for any of your financial goals, such a situation may arise. In case of retirement it may mean either working for more no.of years than planned or exploring a new income stream post retirement. There are various financial and non financial factors to be considered before deciding on how much annuity can one get.

shilpi

Amitkumar February 22, 2011 at 7:50 am

govment hailth insorence, muchal found, pencen plan,