-
-
-
Services
-
-
-
More
-
POSTED BY ON February 18, 2014 10:57 am COMMENTS (2)
While planning for future, many of us keep on hearing “inflation will eat your savings”. How to factor this inflation and other factors* while retirement planning.
(this is continuation of our discussion for https://www.jagoinvestor.com/forum/need-advice-on-my-financial-status).
* = Even i am not sure about the “other factors”, i hope that this discussion will get some insight into this
Thanks,
Rahul
2021 © Jagoinvestor.com All Right Reserved
Dear MoneykaDoctor,
Thanks for the realistic answer.
My concern is that, many of the financial decisions made by individual/planner aims to beat the “inflation”….and they use one figure to justify their calculations.
Also, the inflation numbers used in future cash requirement projections are very sensitive. So, don’t you think that the very basis of financial planning lead to achieve goals based on wrong assumption?
Thanks,
Rahul
Hello rahul123,
My 2 cents:
1. I think inflation cannot be a single number for anyone. One needs to segregate expenses and look at the inflation for each of them. Do we really expect Education, Healthcare, Food and utility costs to grow at the same rates?
2. Apart from inflation, one needs to look at the composition of expenses in one’s life at different stages. For a young individual / couple without dependents, entertainment and discretionary expenses may form a very large part of the expense pie whereas healthcare expenses may be negligible. For a senior citizen it may be the exact opposite. Long term financial planning must take this into account or the projections care likely to be disastrously inaccurate.
3. It is impossible to make very accurate projections over 2,3,4 decades. Is spite of devoted and intelligent efforts, we are still likely to see a reality that’sdifferent from our projections.
However, this is not always a problem.
Inflation, interest rates, economic growth rates(like GDP), investment returns, are all linked to one another. Over long periods of time, high inflation typically also means higher growth, higher incomes, higher return on investments, etc and vice versa. Only the correct asset allocation model can help us achieve our financial goals. Once you’ve put that in place, the fluctuations in actual numbers won’t matter too much.