How does inflation impact your long-term retirement savings?

Inflation is an invisible levy on your investment portfolio, including retirement funds. “Over time, the cost of living increases, meaning that what you can purchase today for Rs 10,000 will require Rs. 42,900 in 25 years, assuming an annual inflation rate of 6%. As a result, it becomes imperative to consider inflation when planning and saving for retirement, ensuring a comfortable second innings of life,” says Anup Bansal, Co-Founder, Scripbox.

This piece will help you understand how you can safeguard your long-term investments and build an inflation-beating retirement corpus.

1. Analyse existing and future income inflow vs outflow: The first step is to gauge how much money you will need when you retire. For this, you need to consider your existing and future expenses, health conditions, and life expectancy rates. Also, consider your family responsibilities, debt, and the kind of lifestyle you wish to live post-retirement. This will provide a clear picture of how much you need to invest.

2. Maintain exposure to equities: While inflation can impact equities, historically, they have offered a potential hedge over the long term. Adding equity to your retirement portfolio can help you earn returns that are higher than inflation. Bansal said, “You can invest in a range of equity options such as stocks, mutual funds, ETFs, index funds, and more based on your preference and risk tolerance level.”

3. Diversify your portfolio: Inflation and your risk profile determine the nominal target returns. “Real returns are defined as the difference between nominal return and inflation. A conservative profile may target a 1%-2% real rate of return, whereas an aggressive profile may target a 3+% real return. You should allocate your investments across different asset classes, including stocks, bonds, real estate, and commodities. Diversification helps spread risk and achieve the target returns,” said Bansal.

Besides, during the early years of investing for retirement, you can be equity heavy and gradually increase the share of fixed-income instruments as you near retirement. There are fixed-income instruments focused on reducing inflation’s impact, such as inflation-index bonds, which can provide better returns than its counterpart. You can use these tools to diversify your portfolio.

4. Regularly review and adjust your investments: Inflation is not static; its impact can vary over time. Experts suggest one must check their investment portfolio periodically and make necessary adjustments based on prevailing economic conditions and retirement goals. One should always consult a financial advisor who can provide guidance tailored to one's specific circumstances.

Thus, to safeguard your retirement investments, it's crucial to understand the effects of inflation and implement appropriate strategies. By taking a proactive approach and seeking professional advice, you can ensure that your retirement goals are on track.