Retirement Planning Tips: Everyone wants to collect a good amount of money for their retirement so that they do not have to face a financial crisis during that time. Therefore, people start saving and making various types of investments for their retirement years in advance. But while doing this, we often make a mistake. We plan according to the value of money today. Like today, if you can easily manage monthly expenses in 50 thousand rupees, then even after 20 years you plan to keep the same amount in mind.

But have you ever thought that your money will not have the same value after 20-30 years? Rising inflation gradually reduces our purchasing power, that is, today even if you find 50 thousand rupees enough for a month, after 20 years you may have to spend more money to manage monthly expenses.

Effect of inflation on purchasing power
Inflation has a very deep impact on our daily lives because it gradually reduces our purchasing power. If you are thinking today that 1 crore rupees will be enough for you after 20 years, then first know how much the actual value of 1 crore rupees will decrease after so many years. This means that the amount that seems very big to you today, its value will not be that much in the future.

Let us explain this to you by giving an example, in the year 2010, the price of a gas cylinder was Rs 350, but now in some parts of the country, its price in the year 2025 is around Rs 1,050. That is, its average price has increased by 7.6% annually. Similarly, in 2009, where you used to buy 2 liters of petrol for Rs 100, today, with the same amount, you can buy only 1 liter of petrol. This shows that inflation has almost halved your purchasing power during this period.

How is inflation measured?
The government uses the Consumer Price Index (CPI) to measure inflation. The CPI data includes the increase in prices of essential items such as food, clothing, housing, transport, health, electricity, education, etc. India's CPI-based inflation rate was 3.61% in February 2025, but it has averaged more than 5% in the past years. The CPI inflation rate was at a high of 12.2% in 2013 and fell to 1.5% in 2017.

The Reserve Bank of India (RBI) targets to keep the inflation rate at 4%, with a flexible band of 2% on either side. However, the actual cost of essential commodities is often higher than the official figures released by the RBI.

Real vs Nominal Return on Investment

Traditional fixed income investment schemes such as bank fixed deposits, Public Provident Fund (PPF), EPFO, Post Office Savings and Sukanya Samriddhi Yojana (SSY) typically offer annual returns of 6% to 8.25%. After adjusting for inflation, the real return from these investment products is only 2-3%.

On the other hand, equity-linked investments, such as mutual funds, offer slightly better returns than this. If we look at its past returns, equity mutual funds have typically given annual returns of 12% to 15%. But after taking inflation into account, the actual return of mutual funds comes to 6-9%.

Inflation-adjusted retirement fund calculations

Let us understand through an example how inflation erodes the value of your savings and money over time. Suppose a 40-year-old person wants to create a corpus of Rs 1 crore today for retirement at the age of 60. If we assume an average annual inflation rate of 5%, then this person will have to invest Rs 18,000 per month in mutual funds through SIP to achieve his target. We are assuming a 15% annual return on SIP. Keep in mind that the annual return may be more or less than this.

Inflation-adjusted calculation:

Monthly SIP: Rs 18,000
Investment period: 20 years
Estimated annual return: 15%
Total investment: Rs 43.2 lakh
Total return (inflation-adjusted): Rs 59.64 lakh
Future value (after 20 years): Rs 1.02 crore

Thus, after adjusting for inflation, the future amount after 20 years becomes Rs 1.02 crore.

Nominal calculation (without inflation adjustment):

Monthly SIP: Rs 18,000
Investment period: 20 years
Estimated annual return: 15%
Total investment: Rs 43.2 lakh
Total return (nominal value): Rs 2.23 crore
Future value (after 20 years): Rs 2.73 crore
This means that the amount of Rs 2.73 crore after 20 years will be equal to Rs 1 crore today. That is, if someone can buy things with Rs 1 crore today, then he will need Rs 2.73 crore to buy the same things after 20 years.

Keep inflation in mind while doing financial planning.
With this, you can now understand very well how important it is to keep inflation rate in mind while planning for retirement and other financial goals. Many investors set their target corpus without taking inflation into account and later realize that the actual value of the capital they have raised has eroded significantly. Hence, for financial security, investors should always keep inflation in mind while setting financial goals.

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